Globalstar, Inc. (GSAT) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2012 Globalstar Inc. Earnings Conference Call. My name is Florice, and I will be your operator for today's call. [Operator Instructions] Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Dean Hirasawa, Director of Public and Investor Relations. Mr. Hirasawa, you may begin.

Good afternoon, everyone. Thank you for joining us for today's conference call to discuss Globalstar's 3 months results for the period ended September 30, 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 September 30, 2012, which will be filed later today. The press release, 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, which is Wednesday, November 14, 2012. Today's 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 presented by Mr. Jay Monroe, Chairman and CEO of Globalstar Inc. His prepared remarks were prerecorded earlier this morning, and due to a serious family emergency, which arose earlier today, Jay is now planning to join the call remotely for the live Q&A session. Our thoughts and prayers go out to his family. Joining Jay on the call are Director of Finance, Tim Taylor, who's filling in for Corporate Controller, Rebecca Clary, who's on maternity leave; Barbee Ponder, General Counsel and Vice President of Regulatory Affairs; 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.

Thanks, Dean, and good afternoon, everyone. I'd like to note at the start that the prepared remarks today will be a bit longer than usual, as we have a number of new participants dialing in for the first time, and we have a lot of new material to cover. Let's begin with Slide 2 and highlight our quarterly progress and recent accomplishments. During the third quarter, we continued the momentum in revenue and adjusted EBITDA growth we began in late 2011, recording our fourth consecutive quarter of positive adjusted EBITDA. Further, we had continued improvement in revenue growth as a result of increased duplex usage and a higher ARPU, plus strong growth in the SPOT and M2M simplex data businesses. Our service levels also continue to rise, prompting duplex subscribers to increase usage on the network and our dealers and resellers to reengage as quality service is restored. As most of you know, we are on the verge of completing our second-generation constellation. And throughout the quarter, we continue to deploy new satellites. Just a few weeks ago, Globalstar, Arianespace and the Russian launch partners initiated the fourth launch campaign, and we are now scheduled to launch in February. This is the final launch to complete full service restoration. Additionally, in mid-October, teams from Globalstar and Thales successfully uploaded the momentum wheel software patch to the one satellite whose service was disrupted due to this issue and the satellite is now processing initial call traffic. We plan to place it into full service by the end of November. Now turning to our terrestrial spectrum initiative. Yesterday, Globalstar filed a petition for rulemaking with the FCC for authority to utilize its licensed spectrum terrestrially to provide a host of innovative mobile broadband services, including one service that we had not previously announced. Because of its significance, I'll discuss this opportunity in detail after our financial and operational review. Now please turn to Slide 3. I'd like to introduce Globalstar's Director of Finance, Tim Taylor, who is standing in for Rebecca Clary, who would normally handle this part of the call. I'd like to congratulate Rebecca on the birth of her healthy daughter 2 weeks ago. Tim will provide a summary of the financial results for the third quarter. Tim?

Thank you, Jay, and good afternoon, everyone. As outlined on Slide 3, we have reported third quarter results that represent a significant improvement over the prior year's quarter. Globalstar has witnessed continued growth throughout our principal operating segments, including SPOT, M2M simplex and after a 5-year period of attrition, our duplex business has begun to grow again. As expected, the cost improvement initiatives enacted in late 2011 have produced sustained financial benefits. The ability of the company to leverage these improvements on growing revenue base has driven a substantial increase in operating cash flow and adjusted EBITDA, and the company remains on track for its best year in the last 5. Revenue was $20.5 million for the third quarter of 2012 compared to $18.2 million for the same period last year, an increase of $2.3 million or 13%. We grew both service revenue and subscriber equipment sales of $1.1 million and $1.2 million, respectively. Service revenue was $15.3 million for the third quarter compared to $14.2 million for Q3 2011. This improvement was driven primarily by a 33% increase in SPOT service revenue. As expected, Duplex service revenue was slightly lower in the third quarter compared to the same period last year but increased 11% from the second quarter of this year, and 19% in comparison to the first quarter. The sequential increase in duplex service revenue throughout the 2012 is due to improvements in service levels and the impact of subscriber upgrades to higher revenue-generating plans. Total duplex usage on the network in Q3 2012 increased 37% versus the prior-year quarter. We view this as a leading indicator of future revenue growth, as subscribers are transitioned from lower-priced unlimited plans to higher-priced plans. The satellite market at a competitive level is driven by 3 core elements: Cost; voice quality; and coverage. We maintained inherent existing advantages versus the competition with respect to both cost and voice quality, and are beginning to see coverage levels that should restore Globalstar's position as the provider of choice in MSS. Based on recent market announcements, our competition will increase pricing on their existing subscriber bases. We welcome this dynamic and believe it will only help heighten the appeal of Globalstar in the marketplace as we look to significantly increase our market share over the coming year as service levels expand. Subscriber equipment sales were $5.2 million for the third quarter compared to $4 million for Q3 last year. Simplex equipment sales increased 85% due to the expansion into new commercial markets and geographies for these devices. Duplex equipment sales increased 164% as we have now achieved a level of service, driving subscribers to begin to reengage. These increases were offset by decreases in SPOT equipment sales associated with a onetime rollout of new SPOT products in 2011, which produced unusually high sales volumes in the third quarter last year. Globalstar reported adjusted EBITDA of $3.1 million for the 3 months ended September 30, compared to negative adjusted EBITDA of $3.5 million for the third quarter 2011. This represents an increase of $6.6 million. The improvement in adjusted EBITDA resulted from an increase in revenue of $2.4 million, and a decrease in operating expenses of $5.4 million, excluding EBITDA adjustments. The decrease of approximately 29% in operating expenses was largely due to the implementation of structural improvements and streamlining initiatives introduced in late 2011. Year-to-date, adjusted EBITDA is $7.3 million, an improvement of $15.4 million over the same period in 2011. The company reported a GAAP net loss of $41.2 million for the 3 months ended September 30 compared to a net loss of $0.7 million for the third quarter of 2011. This loss was due primarily to a noncash derivative loss in the third quarter of 2012 compared to a noncash gain in the third quarter last year, combined with increased depreciation expense as more satellites were placed into service. Now turning to the balance sheet. After the Thales arbitration decision and the subsequent settlement agreements, the COFACE lenders evaluated whether there had been a breach of any nonfinancial covenants representing potential events of default. In mid-October, the company and the lenders entered into a waiver, which permitted Globalstar to make a draw from the contingent equity account. This waiver confirmed that the lenders concluded that events of default had occurred as a result of the Thales settlement. In accordance with the applicable accounting rules, the COFACE borrowings had been shown as current on the September 30 balance sheet. However, we are currently engaged in discussions with the lending group to obtain a waiver or amendment associated with any defaults. And now, an update on the company's liquidity position and plans for raising additional capital in 2013. As of September 30, the company had cash and equivalents of $1.2 million, in addition to the restricted cash of $50.4 million. The restricted funds consist of cash held in our debt service reserve account. As of September 30, the funds available to be drawn from the COFACE senior debt facility and contingent equity account was $3 million and $22.8 million, respectively. We continue to expect to draw the entire remaining amounts held in the COFACE facility and the contingent equity account by the end of this year. In order to fund the remaining capital expenditures, we are currently seeking to raise additional debt and equity capital and amend existing debt obligations. These processes have been initiated and we hope to complete these activities in the first quarter of next year. Let's turn to Slide 4. After a period of more than 5 years of an intense internal focus on rebuilding the company's constellation, Globalstar is now well-poised to enter 2013 on track for strong growth throughout every business line. Globalstar has endured through many difficult challenges in recent years. Nevertheless, we remain resolute and confident in our ability to execute and have already significantly improved operations. We look forward to continuing to drive financial performance as the company enters its next stage of growth and to realize the potential of the unique set of assets we control. And now back to Jay.

Thanks, Tim. For those of you who are new to Globalstar, Slide 5 illustrates the 3 fundamental drivers of our value proposition. They are our low-cost second-generation satellite ecosystem, our breakthrough mass-market consumer products and our valuable spectrum assets. Let's take these in order. First, with just one more launch to go, we are nearing the completion of the deployment of the second-generation constellation and doing so at a fraction of the cost, both of our first network and of the competitors. This new network provides us with significant cost benefits and a network performance enhancement suite years before the competition and the means to reemerge as the preeminent provider of affordable, high-quality mobile satellite voice and data services. We expect our new satellites to reliably deliver the highest voice quality in the industry for the next 15 years. Additionally, due to the low cost of the constellation and the ground segment, we're in a strong and defensible competitive position to offer the best value proposition to our customers. Our network has the capability to deliver voice and data mobile connectivity to 2 billion people who either live, work or play outside of cellular's reach. You might find it surprising that approximately 75% of the earth's landmass has no wireless or wireline coverage. We are increasing capacity utilization on a new network that has almost unlimited capacity. We can support 34 billion text M2M transmissions or other small bit messages per day or 19 million voice or data minutes everyday. With an understanding of the size of the network's capacity, value-added resellers and other partners are rushing to develop new and innovative satellite solutions to meet the growing demand for both commercial and consumer markets. The relative simplicity and low-cost nature of the global satellite and network compared with costly cross-linked or geostationary space networks prone to high latency positions Globalstar to deliver an unmatched offering to our customers. Second, Globalstar is the only MSS provider to have successfully launched and mass distributed an affordable mobile satellite device to the mainstream retail consumer marketplace. To date, we have shipped more than 412,000 SPOT GPS products to our network of over 10,000 points of retail distribution around the world. It is our goal to leverage this unique retail success to provide commercial and consumer distribution with an enhanced product roadmap, one that is designed to increase the consumer adoption of MSS products through lower cost, enhanced functionality of the company's product portfolio. The third value driver is based upon our global spectrum authority and the increased utilization of our authority to provide both commercial, life-saving MSS services and terrestrial uses for valuable broadband services in the U.S. We have filed a petition for rulemaking with the FCC just yesterday to enhance our ability to use this spectrum terrestrially. We'll have a detailed discussion of our petition later in the call. Slide 6 looks at the value drivers in an expanded way and provides the eventual goals of the current ongoing major initiatives. Now let's move to Slide 7 to update our constellation and ground network initiatives. As mentioned earlier, we are on the verge of completing our constellation, and as a result, our dealers and customers are enthused by the significant improvement in our call connection rates. As for the one satellite that was in safe hold mode due to the momentum wheel problem initially experienced in 2011, I'm very happy to announce today that after more than 1 year of development and integration, Globalstar, together with the team of engineers at Thales, have completed the software development and in mid-October, uploaded the software upgrade to the affected satellite. The satellite was then taken out of safe hold mode and completed several weeks of successful testing. It is now processing call volumes, and we plan to place the satellite into full service by the end of this month. This is a critical resolution to the issue and I'd like to thank Globalstar engineers, including Tony Navarra, Paul Monte and their respective teams, in addition to Thales, for this collaborative solution. It not only resolved for one affected spacecraft but it also provides us with a solution for potential future momentum wheels if any occur in the next 15 years. I want to briefly discuss our ground network advantage. The bent-pipe satellites and the gateway system architecture gives us a competitive advantage. First, it provides our customers with regional handset phone numbers, which emulate other mobile devices, which they're already familiar with and increases ease of use, therefore. Second, from a technology upgrade standpoint, each Globalstar gateway is capable of supporting multiple technologies and applications. For instance, simplex and duplex are supported with 2 distinct technologies, and we have the ability to roll out numerous additional technologies as well. Because the brains of the network are on the ground, in the gateways, we can implement next-generation products and services by simply installing upgrades at the physical gateways. As many of you know, we are working with our partners at Hughes Network Systems and Ericsson to provide ground segment upgrades that will provide us with an all IP IMS or Internet Media Services-based core network. This network can support data speeds greater than 25x that of the current network and represents a foundation for an entire new suite of product offerings. Moving to Slide 8. We've provided a snapshot of our current product segments and a number of additional market opportunities that are becoming available to us as a result of our system architecture. Our goal is to continue the development of unique mobile satellite voice and data products and the sales and marketing of those products to a large global addressable market. We currently have 3 major product categories. First, the SPOT family of products, serving retail, recreational, consumer market with one-way devices, currently with approximately 235,000 subscribers. Second, our duplex mobile and fixed telephone handsets and data units, with the industry's highest quality voice and fastest handset two-way data speeds. This product segment targets the remote enterprise, business continuity, public safety, first responder markets. There, we have approximately 95,000 subscribers. And third, our Simplex data, which is M2M asset tracking and remote data monitoring products, targeting the enterprise and commercial customers with about 180,000 subscribers. On the right of the slide, we provided 3 additional strategic area of opportunity for the company as we enter the new phase of Globalstar's life cycle. To sell market and oversee the continued development of our core areas in these future strategic opportunities among others, we have appointed Frank Bell as President of Global Sales and Marketing. Frank comes to us today with decades of wireless industry experience, having held senior executive positions for companies such Sprint, MetroPCS and others, demonstrating a record sales success while maintaining some of the lowest churn and the highest levels of customer and employee satisfaction in the entire wireless industry. Frank will help drive the opportunities we have in air traffic management, government and public safety, and the monetization of gateway assets and new territories, all of which are now possible given the restored service levels. Let's now turn to some really exciting news related to our spectrum. As most of you on the call know, it is outlined here on Slide 9, we are authorized to use over 25 megahertz of spectrum in what is called the Big LEO band. Historically, we have used our spectrum primarily to provide satellite service, but I've always had a vision of offering terrestrial mobile broadband services to help meet the dramatic growth in consumer demand for these services. Globalstar has previously been authorized by the FCC to provide Ancillary Terrestrial Component, or ATC services, over approximately 20 megahertz of the spectrum. Within the United States, this includes almost 8 megahertz of uplink spectrum and more than 11 megahertz of downlink spectrum. However, Globalstar must first meet a series of legacy regulatory requirements, commonly referred to as the gating criteria, before it can actually use this authorization. And due to the highly restrictive nature of the gating criteria, this legacy regulatory regime has generated little terrestrial deployment for Globalstar or any other MSS company. Earlier this year, the commission issued a Notice of Proposed Rulemaking in the DISH network proceeding that proposed to eliminate the ATC regime and the gating criteria altogether and replace it with a more flexible regulatory framework. We understand that the Commission will take final action on DISH by yearend. This is exactly the framework Globalstar is emulating in its filing yesterday. Turning to Slide 10. Yesterday, we filed a petition for rulemaking with the FCC to permit us to use our exclusively licensed spectrum for a host of new mobile broadband applications. This filing represents the culmination of years of hard work and patience and closely tracks the FCC's proposal in the DISH proceeding. In our petition, Globalstar proposes pro investment, pro-consumer reforms that will enable the company to make that type of efficient use of spectrum that the Commission itself seeks under the National Broadband Plan. The FCC filing is available on our website, but let me walk you through it. It's very important to understand that our petition proposes 2 distinct but complementary terrestrial uses for our spectrum: First, we propose to use our entire spectrum allocation as part of an LTE-based mobile broadband network, as we have discussed on prior calls. Second, we propose a completely separate near-term plan to utilize our 2.4 gigahertz spectrum for a truly innovative terrestrial low-power service offering, which we call TLPS. I want to speak about the near-term plan to provide TLPS, a significant opportunity that we are sharing here for the first time. At its essence, the cellular networks are becoming constrained and additional spectrum needs to be deployed in order to meet the growing demands of wireless usage. We're approaching an acute problem in the United States where technological development and innovation may actually be inhibited due to the shortage of available spectrum. Wireless subscriber connections in the United States have grown to over 320 million, with annualized minutes of use greater than 2.3 trillion. As the cellular networks across the U.S. have become more and more congested, driven by the deployment of high data-consuming mobile smartphones, tablets, computers and so on, WiFi offload has provided a sensible way to reduce the loads on the cellular networks. WiFi typically offers enhanced performance at low cost and operates without the monthly data usage caps you see with cellular plans. As a result, the country has witnessed exponential growth of WiFi across the mobile consumer device ecosystem. WiFi leverages the existing infrastructure embedded in most of today's handsets, and more than 70% of smartphone owners use WiFi on these devices to some extent. However, this growth has led to high channel crowding in the spectrum bands devoted to WiFi in many areas of the country. This crowding limits download speeds, capacity, range, quality of service and so on. As many of you have probably experienced, your WiFi likely doesn't work as well as it once did, especially when you were attempting to use it in a hotspot in a metropolitan area. This increasingly frustrating experience is most acute in high traffic areas such as airports but is becoming increasingly common everywhere as cellular offload increases. The result is predictable. Existing WiFi channels are nearing saturation, service levels are becoming compromised, speeds are slowing, and the problem is only getting worse. Turn to Slide 11 where we show a 3D spectrogram that represents WiFi usage in Boston, on the channels that currently transmit WiFi service. You'll notice that the high channel crowding on the existing WiFi channels in the green and red, on the left and the center of the page, between 24.01 and 24.73 megahertz. This is now typical in a majority of metropolitan environments. The heavy use shown in green and red acts as a fundamental limiting factor for throughput potential for speed, for range from an access point and for service quality. Up to now, no solution to this overcrowding has been available. Globalstar's terrestrial low-power service could change all of this. On the far right of the spectrogram, you can see that Globalstar's 2.4 gigahertz band sits adjacent to the unlicensed spectrum, over which WiFi currently operates. Our band offers inherently beneficial characteristics such as low noise floor, low interference levels, resulting in high data throughput. The low interference characteristics of our band mean that transmissions can be maintained at a multiple of the range of other adjacent channels and at speeds which are a multiple of WiFi speeds available in the green cluttered channels on the left side of this slide. Using Globalstar's bands, consumer devices will have significantly greater performance capabilities on a managed controlled network. Turning to Slide 12. You can see that Globalstar is uniquely situated to alleviate the current congesting being experienced by WiFi users by combining its spectrum at 2483.5 through 2495 megahertz with the adjacent public ISM band, which is a portion of the band commonly known as WiFi, at 2473 through 2483.5. We're not proposing to take over exclusive use of the ISM portion but rather, use it like any other unlicensed provider is permitted to do. But in our case, in a strictly managed operation. This creates an all-new 22 megahertz channel, which is the standard WiFi channelization that can be used for additional mobile broadband capacity. This is effectively a new clear channel, providing considerable data speed and range advantages over interference limited public WiFi channels. Our plan is for Globalstar's controlled service over newly deployed hotspot points that could effectively increase total WiFi capacity across the entire United States by 33%. In order to make this terrestrial low-power service a reality, Globalstar is requesting that the commission establish an AWS-5 terrestrial use license that covers our 11.5 megahertz of spectrum. In addition, Globalstar's plan is to utilize the adjacent unlicensed ISM band on a nonexclusive basis, just as others are permitted to do today. The FCC can recognize an extraordinary opportunity to leverage Globalstar's unique spectrum location in the 2.4 gigahertz band, the public's prior investment in WiFi-enabled devices, and the development of 802.11 technologies to advance the rapid deployment of this innovative terrestrial low-power service. Importantly, if you turn to Slide 13, you will see that what we are proposing can be deployed in the very near term because it leverages infrastructure and WiFi devices already in the marketplace. We hope and believe that the commission finds our proposal just the type of spectrum solution that the Chairman and the other commissions have been discussing in their recent speeches. The next step is for the commission to place our petition out for comments, and commence a rulemaking to establish the AWS-5 terrestrial service license within our existing downlink allocation. Now I'd like to discuss our longer term terrestrial plans, separate and distinct from the low-power service just discussed. Our petition requests authority to operate an LTE-based terrestrial network across the entirety of our Big LEO band. We believe that over the long term, the highest and best terrestrial use for Big LEO spectrum will ultimately be for LTE operations, at least in large swaths of the country, while our TLPS could operate forever in other areas. Globalstar has proposed an open and transparent rulemaking proceeding in which all interested parties are invited to participate and resolve any issues that may be identified regarding Globalstar's terrestrial LTE plans. Our requested authorization is based largely upon the same principles that the FCC itself proposed in its NPRM for DISH networks in March of this year. Final approval for DISH is probable next month when the FCC is expected to grant the very type of relief that Globalstar seeks in its own proceeding. To conclude today, looking forward from here, with reinvigorated MSS operations and a robust mobile broadband buildout in its MSS bands, Globalstar will be able to provide a full range of satellite and terrestrial services to consumers, public safety users, government, business customers in rural and remote communities throughout the United States and indeed, the world. We look forward to working with the commission through the rulemaking process over the coming months and believe that the spectrum opportunity and the strength of our core MSS business will drive fundamental improvement in the telecommunications industry and will offer the market an enhanced suite of both consumer broadband, as well as satellite services. Dean, I believe we're ready for the first questions from the audience?

Thank you, Jay. That concludes the prepared portion of the presentation. Operator, can we now proceed with the Q&A session?

[Operator Instructions] Jim McIlree from Dominick and Dominick is online with a question.

Can you talk a little bit about how this migration from the short-term plan to the long-term plan might work? I'm struggling with -- if you have this -- if you have users on channel 14 using some kind of WiFi-like service, how do you ultimately migrate them to an LTE-based service assuming that everything goes your way with the FCC?

Jim, this is Jay. Can you hear me okay? I think there are a number of different options that will play out over time, and I think the biggest question is when does approval for LTE come relative to approval for the low-power service. If you exploit the low-power service, it may very well be that it happens in geographies that are extremely clogged already, picture a major metropolitan area like New York. And there, that service could exist forever because it's highly valuable to get the terrestrial cellular networks offloaded to WiFi for a number of different reasons. And we would expect to do something, which is coordinated so that anyone who elects to work with us on this service knows in advance that they have the opportunity to do both services. And therefore, you can imagine geographic uses of one service versus the other, and that will have to coexist both with those 2 services and with the satellite network in order to be able to fully utilize the value of both of these authorities that we seek. But I do believe that the short answer is we can't know every single option at this juncture, and we'll be working on exactly those types of issues over the next year.

Okay, that's helpful. And also, on channel 14, it seems to me that essentially other users who would like to use that channel are off-limits unless they come through you because legally, they can only use 1/2 of the channel. If they want to use the whole thing then they have to come to you and you can't really use 1/2 the channel. Am I understanding that correct that de facto, it becomes your channel?

Not really. There are plenty of uses that are permitted in the ISM band that are not WiFi. The simple examples of that are Bluetooth, microwave ovens, garage door openers and a whole host of other non-WiFi uses. Those uses will coexist with us in the upper part of that ISM band. Those uses are not permitted today in Globalstar's lower Big LEO. They're in that 11 megahertz that abuts it. And so those will continue to coexist as they have a right to do. It's just that if somebody wants to operate something, which is a WiFi protocol, which demands a 22 megahertz channel, they cannot do that in that channel 14 without it really being governed through Globalstar. So the simple way to think of it is non-WiFi uses will continue to coexist and those that are WiFi uses will have to be coordinated through Globalstar.

Okay. And 2 more questions, if I may. Can you lay out your capital spending plans or needs over the next couple of quarters and then for 2013 in its entirety? And then secondly, can you talk a little bit about the duplex migration to the higher plan, how that's going right now? That is of the duplex subscribers that you got in Q3, how many went to the higher-priced plans or it's a little bit too early to talk about that?

Sure, Jim. This is Tim. I'll break it up in a couple of different segments. To get us through the end of 2012, there's another $3 million to be paid to Thales, which 100% of that comes out of the COFACE facility, plus about another $4 million of other CapEx. So a total of about $7 million to take us through the end of December. On top of that, there are -- there's about $20 million associated with direct launch-related CapEx payments to Arianespace and for launch insurance, just about $20 million. So $20 million plus the $7 million in 2012 is about $27 million. If you look at the company's current liquidity position, we have $1.2 million of cash plus $3 million available in the COFACE facility, plus about $23 million in the contingent equity account, which also totals about $27 million. So you can expect that the company will be raising funds in early 2013. It's a bit premature to give much guidance on how that's actually going to be structured. There's, of course, a number of potential sources of capital, including additional senior secured capital, subordinated debt or traditional equity capital, how that comes together, we're certainly working on that now and as soon as we have something announceable, we'll share that with you. With regard to the next question on duplex ARPU, so over the last couple of years, we continue to reduce plans in order to keep subscribers on our network. And ARPU has essentially gone from $16 down to as low as about $15 at the end of 2011. Beginning in 2012, we initiated a process to start migrating subscribers to higher rate plans. Our core plan right now is an all-you-can-eat $40 a month plan. And really, it's starting in January, we started transitioning subscribers to that plan. You've seen the impact in the numbers. We've gone from about $15 in Q1, up to about $17, and then essentially $19 in Q3. Today, we're about $20 run rate. So we continue to migrate duplex subscribers to higher rate plans. You'll continue to see an increase in duplex ARPU as we improve coverage over the next 8 months. And the plan long term, again, it's premature to give much guidance on how that will be structured, but I expect to see a significant improvement in duplex ARPU through the middle of next year.

Brett Feldman from Deutsche Bank is online with a question.

I just want to understand a little more about some of the spectrum stuff you laid out today. Just so I'm not confused, the TLPS service, that's basically WiFi, am I correct?

Basically, Brett, yes.

Okay. And you're committing, if you get the rules that you need from the FCC to deploy, I guess, you say thousands of hotspots, so if you're putting out free hotspots, what is sort of the bigger strategy for monetizing the WiFi connectivity that you'll be making available to this decision of the FCC?

Brett, the long-term plans are things that we're working on right now. There are multiple opportunities to monetize WiFi, as you know, from the many business models that you cover. And there are some unique opportunities that would come from a private WiFi-ish service. And those are plans that we're working on with a number of parties, as you can well imagine. Our issues there are to make certain that the quality of service stays high, the service is differentiated and all of the things that we talked about previously, in terms of throughput, speed and so forth, come to and stay, come to fruition and stay. So that's what we're about in that regard. It'll take a while for the process to be approved at the FCC. And of course, we'd like that to happen at the earliest possible time. But while it is being worked, we're in discussions with a lot of different parties about how to best utilize the eventual service offering.

So I wanted to go back to the question before about the evolution of the spectrum use because you sort of outlined, I think, 3 different types of services that are going to be deployed over your spectrum. You have MSS, you'll have TLPS and then you'll eventually have LTE. Are these services something you can actually offer at the same time over the -- in the exact same geographies? Or is it ultimately going to be a decision where if you have all the approvals you need in your more remote areas, you'll be using that spectrum for satellite services. In the mid-congested areas, you'll be enabling LTE. And then in the most congested, it would be TLPS? Or am I completely misunderstanding the spectrum management plan?

You're not completely misunderstanding it at all, and what you described is one of multiple possibilities. Let's be clear on just a couple of things. In the most remote areas, you're exactly right, that will remain MSS, of course. In the intermediate areas, it could go either way for a number of different reasons. But when you think about the MSS service, too, remember that part of the value of MSS to public safety and other is when a network goes down, Globalstar still functions. And so what we just saw in the case of Sandy on the East Coast was a situation where the cellular networks were not robust. In a number of areas, they went down, terrestrial, wireline networks went down. And I was still receiving calls from many people who own Globalstar products, they were calling me to say that, that was the one that was still working. And so there is a first responder and public safety implication even in areas like Manhattan from the satellite service. Ultimately, how the combination of TLPS and LTE plays out depends a little bit on the partnerships that we strike to monetize it. And as we strike those, I think the opportunities will become clearer and of course, we will explain to the market what we see in those opportunities as soon as we reasonably can. But right now, we're staying flexible as the process begins to play itself out at the commission. And there, our first work is to make certain that, that goes through and is approved and that we do it in a way that it's open, it's transparent and everybody involved in the process has their say on what comes out the other end of it.

This is a one last one and then I'll get back in the queue if I need to. But if I think about the process that you would go through here with the FCC, and let's assume that they agree and they decide to pursue a rulemaking. It would seem that the rulemaking would address all of these proposals and that they would conclude it and have an order at the same time. So why is it that once that it's all done, you would have this TLPS offering but you had to delay until you would be able to offer LTE on the other spectrum?

I believe that the way that we constructed it was to be sensitive to the GPS interest. We believe that what we're offering will -- on LTE in uplink and our lower Big LEO band will be non-interfering, but we didn't see any reason to try and rush it and package it all together and be perceived of as trying to rush it. GPS has very legitimate interests. Globalstar has very legitimate interests. We are, in fact, at our core, a GPS company, and hundreds of thousands of our subscribers operate devices which coexist every minute of their operation with GPS. But still, that is an issue that we want to make sure it gets vetted out officially and completely and clearly so that after we get that approval, everybody knows that it was done correctly. Now as a practical matter, that could take longer and that's why we set up the regulatory paradigm as we did.

[Operator Instructions] Tony Wildbird from Scarsdale Equity is online with a question.

Jay, first of all, I wanted to thank you because I'm one of these people who own a Globalstar phone, which I bought to assist me in Costa Rica where I have a place and telecommunications are an adventure under the best of conditions. But I live in Stanford, Connecticut, on the water and on Tuesday morning, nothing worked, and landlines were down, and AT&T has been down for 2 weeks. And the cellular phones didn't work, or they barely worked. I think I had a Sprint phone and you could get a 10-second call after 8 tries, and my AT&T phone didn't work at all. But the one thing that did work was my Globalstar phone. I mean, it's true that I had to walk out the door to use it, but -- And I didn't have access to the times weren't operational, but basically, it worked, I would say, 70% to 80% of the time. I had a signal, I made my calls, and it was a tremendous relief. And I would advise anybody who deals with a hurricane to get one.

Thank you. Tony, I appreciate it. I'm glad that it worked for you. The constellation repopulation made that possible. So we got our first couple of dollars as we monetize the new constellation. Thank you.

So -- okay. So my -- I have 2 questions. One is I'd like to follow-up on a question I asked 3 months ago about your service versus Iridum in terms of quality, given that yours is getting better and theirs is getting worse. And I'd like to know whether or not we've reached the crossover yet? The second question I have is -- I mean, I think one of the biggest problems that we, shareholders of Globalstar have, is that your cost of capital is extremely high at this point. And I was wondering whether there were any opportunities to somehow monetize the spectrum before the satellites were launched and before these rulemakings were completed?

Tony, I think I can answer the first question for you, and maybe I'll let Tim talk a little bit about the cost of capital and the timing for anything along those lines. But we don't do detailed work on Iridium's constellation. We only know anecdotally from our dealers that they are experiencing some issues and those issues maybe are not unlike the challenges that Globalstar had beginning in 2007 or so. And so we do expect that at some point or another, there will be an actual crossover. I do think it depends upon where you're operating, the nature of our architecture being a little bit different than theirs. I can tell you that I recently traveled to the bottom of the Grand Canyon, and I had a very difficult time using their phone. I made many telephone calls on Globalstar, I'm proud to say, and so I think it depends a little bit on geography. If you're close to a Globalstar ground station, my guess is that you can -- you'll have a higher call success rate already with Globalstar than the experiences with Iridium. But that's just my guess. And again, anecdotally, what we're hearing is just coming back from dealers and users who are experiencing better and better service from Globalstar, that makes us happy, and now they're able to compare it directly with Iridium and are more comfortable, seemingly today, buying Globalstar, which of course, makes us very, very happy. Tim, would you like to take the second issue?

Sure, sure. So Tony, the large component of the company's current capital structure consists of a $586 million COFACE facility, which is priced incredibly attractively at essentially L plus 2% taper. We're going to continue to seek this type of low-cost capital. And I think, going forward, that type of senior secured low-cost capital is going to be the primary source. But of course, raising any kind of equity or equity-linked securities when your stock's at $0.30 or $0.35 is very costly. And I think, from a stock price perspective, we're really waiting on a couple of seminal events where if they happen, if they happen successfully, including the 4th launch, we're going to be substantially above $0.30 or $0.40. So we certainly would hope that we're not raising capital at $0.40 or $0.45 or even a slight premium to that. But that we're able to take care of some of these seminal events and raise capital from a position of strength as opposed to a position of weakness, which we're in right now.

Well, the big issue I see is the 5.75 come due I forget whether it's the beginning or the end of April. So essentially, if the launch is in the first week of February, that does not give you a lot of time to deal with this issue, and the issue is pretty significant. I mean, $72 million of the stuff outstanding. So if the stock is at $0.35, and you issue some kind of new convertible, let's say, convertible, I'm going to make this up at $0.50, you create, what -- no, 150 million shares. And if you do it at $1.50, then you will create 40 million shares, which is a huge difference. So that's where we're at. Now again, if somehow, you could get some money out of the spectrum to deal with this issue, that could be very advantageous for the stockholder, as well as being very advantageous to anybody who took the other side of the transaction on the spectrum, if in fact, such a deal were possible, structurally speaking?

Well, Tony, for sure, we will be in conversation with a number of parties, have been for some time, and we'll continue to be in those dialogues. If, for whatever reason, those conversations move more rapidly, we are very familiar with what your issue is and agree with, of course, wholeheartedly. So if we can drive those conversations on a faster track, trust me, we will do exactly that.

So the issue is not that they're impossible, but they're difficult, they're structurally difficult?

Right. I mean, imagine that you're in a situation where your spectrum is not fully certified for each of these uses, and it won't be in the next couple of months, it becomes more challenging to have that conversation. But we're in dialogue, of course, because spectrum is so important to so many people's business plans. But handicapping whether we'll be able to get something done at the end of the year or in the first couple of months of 2013 is just that, it's handicapping at this point. We'll do our best sir, I promise.

Our last question comes from Jim McIlree from Dominick & Dominick.

Tim, I wanted to make sure I understand the capital needs for the next few periods. Where is the Thales arbitration payment due? Is that this year or next year?

Yes. So I'll tell you, I'll walk you through the structure. So it's about EUR 17.3 million, and it's due at the later of 2 events, and those events are the comprehensive financing or the effective date of the contract. So the date is really indefinite on when we actually have to pay that amount. We certainly have to work towards getting a financing done in the first half of 2013. And when the contract actually becomes effective, the $23 million would become due. But there's not a set date when the payment is officially due.

Okay. And what about the launch delay fee? When is that due?

So that's actually paid over a period of time. It's $1.5 million or so for a period of 6 or 7 months that we paid to Arianespace.

And it's $1.7 million -- I'm sorry, $1.5 million total over 6 to 7 months?

$1.5 million per month over a total period of 6 months.

Okay, great, that makes more sense to me. Have you started making that payment yet?

Yes, we have. We're a couple of months into it.

Okay. Well, is that -- again, did you make any of those payments in Q3?

We have, yes. And that's included in the Liquidity section in the 10-Q, it's included in the $4.3 million of additional other obligations in 2012.

I haven't gone through the Q yet, but I'll take a look for it. But doesn't that show up in the income statement somewhere? Shouldn't they show up in the income statement somewhere?

No, it's a capitalized expense.

Okay. And I'm somewhat confident this will be my last question. In 2013, do you need to start making payments for the satellites that you intend to launch in 2015? Are calling those the Phase 3 satellites?

Yes, that's correct term for it. The answer is yes, we would have to pay a percentage of it. So a percentage of it would be funded with debt, but at much greater percentage would be funded with -- so 85% or so would likely be to funded with debt and 15% would be funded with pure equity. So the amount of equity that would come from operating cash flow or existing cash on the company's balance sheet would be not very significant in 2013. It actually gets paid over a long period of time, about 34 months. So we have to continue to make 15% equity payments where the debt, we'd likely fund about 85%.

Right, okay. But as soon as the contract is completed, then you would expect to begin work on the Phase 3 satellites and your 15% would need to be paid?

Yes, that's correct.

There are no further questions at this time.

Okay, thank you. And with that, we will conclude our call. Thanks again to everyone for joining us, and please be reminded that later today, an audio recording of the conference call will become available via telephone dial-in, and a webcast recording and a copy of the presentation will also be available on the Globalstar website. Thank you, and good afternoon.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.