Globalstar, Inc. (GSAT) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Globalstar, Inc. Second Quarter 2015 Earnings Conference Call. My name is Miesha and I'll be your operator for today's call. [Operator Instructions]. I will now turn the meeting over to Jay Monroe. Jay Monroe you may begin.

Good afternoon everyone and thanks for joining our mid-year conference call. I look forward to providing an update on our sales and marketing, network, product development and regulatory initiatives and Rebecca will provide a review of the quarterly financial results. We'll conclude with Q&A and Tim Taylor will join us then. First, I'd like to note that this call contains forward-looking statements intended to fall within the Safe Harbor provided under the Securities laws. Factors that could cause results to differ materially are described in the forward-looking statement section of today's press release and in Globalstar's SEC filings. We're only a few quarters away from the completion of our second-generation ground upgrades which will conclude a multi-year development effort with our partners at Hughes Network Systems and Ericsson. The upgraded network will allow us to sell a host of new products and services and we expect to accelerate our entry into new markets. Historically, expensive MSS user equipment is being replaced with affordable devices, large legacy data boards are shrinking, while processing power is increasing. One-way communications devices are becoming two-way and download speeds are increasing by up to 25x. We expect these enhancements are being developed to reduce cost and expand functionality to drive our growth. Today we remain on track to complete these infrastructure upgrades on schedule. During the second quarter, Hughes and Ericsson completed a number of critical tests, deliveries, installations as planned. Hughes finished over-the-air data testing, as well as lab-based voice calling. The integration with Ericsson is well underway and will continue over the coming months. The radio access nodes or RANs, have been delivered to all of our North American gateways on schedule and we expect the completion of over-the-air testing at all North American gateways to be done in the next 60 days. Finally, during the current quarter, our engineers expect to complete the installation of the final Hughes software loads in North America. Completion of North American infrastructure is still targeted for the end of the year with a new product ready in early 2016. Our European RAN installation should be completed this quarter and we will ship the second generation equipment to South America this quarter as well. As we track our operational progress, an important set of metrics we will focus on over the coming quarters is the contribution from non-North American operations. With the stable North American business demonstrating predictable growth and new opportunities from the second generation ground transition, the percentage of gross additions coming from foreign markets serves as a significant indicator of the success of our operations abroad. In just one year, we have grown the portion of non-North American gross sub adds from only 12% a year ago to approximately 33% today. These markets now account for one-fifth of our total worldwide subscriber base and we expect this percentage to increase to approximately 50% in the next three years. As we have previously explained, our global expansion efforts are focused first in South America. We have also now operation in South Africa and this has cemented our global Simplex coverage footprint and we will soon initiate our Asian sales effort as well. This expansion helped our quarterly Duplex gross adds to grow 37% in Q2 compared with Q2 of 2014 and our SPOT gross additions increased 17% over the same period. After adding almost 24,000 total subscribers in the quarter, our total subscriber base has increased over 670,000. Though the strength of the dollar may continue to be a headwind for service and equipment revenue, given our local currency pricing structure, this has not impacted new subscriber additions. We will continue to grow our subs and expect this growth to accelerate as we introduce our second-generation product shortly. The next generation Sat-Fi development effort remains on track for release late Q1 of next year and is a primary focus of our product engineering teams. The product will be much less expensive, with the bill of material cost of approximately one-tenth that of our first-generation Sat-Fi product cost. We're also focused on rolling out two-way functionality for our SPOT and Simplex product lines. Although we have a substantial subscriber base for one-way Simplex products which will continue to deliver from many markets and users, we look forward to competing in the two-way personal tracking and M2M markets by developing robust tracking and asset management applications. Adding two-way functionality allows us to compete up market and add command, control and two-way texting to many of our offerings. We've recently announced new aviation products which fit into two market segments. First, in aviation antenna which pairs with our Globalstar's SPOT phones and Sat-Fi to offer an entire suite of economical services to the cockpit for the general aviation marketplace. Second, Lockheed Martin is integrating data delivered by our SPOT 3 and Trace devices directly into their service offering, so the pilots and other individuals on the ground can see where flights are, where and when they departed and landed and issue an automatic alarm should certain technical parameters occur while in flight. All of the data will be displayed directly on Lockheed Martin's Web portal. Also on the aviation front, last month ADS-B Technologies and [indiscernible] flew more than 5700 miles from Alaska to the Oshkosh Air Show demonstrating SPOT Gen3, SPOT Trace and ADS-B over satellite. Trace and SPOT 3 track continuously every two and a half minutes for the entire trip, allowing hundreds of people to observe the flight path in real time, in their booth at the show. Simultaneously, the aircraft was being tracked using ADS-B signals over our satellite system at the rate of one signal per second. Each ADS-B data pack includes altitude, heading, airspeed, ID, registration information and literally dozens of other parameters, all in real time. What would this have meant to MH370? As we look forward, in less than a year, we plan to be selling an upgraded suite of new products that will provide significantly lower equipment prices, smaller form factors, materially advanced speeds and expanded service offerings. These changes will allow us to compete, both in existing MSS markets within our footprint or maybe we didn't compete today and also expand the total addressable market for satellite connectivity with unique products at affordable prices. This should enhance existing demand and drive new demand worldwide for us. As we turn to an update of the FCC process, the docket was very busy in the second quarter, as our NPRM advanced. Although progress has of course been slower than hoped and no one is more anxious to bring the process to a successful conclusion than I am, the last few months have still been productive, including the completion of all of the technical reports from the FCC demonstrations. Since the start of Q2, over 50 Ex Partes have been filed in the record, including many from the company and TLPS supporters. We believe we have appropriately addressed the question of coexistence and have demonstrated TLPS' opportunity to put to the highest and best use 22-megahertz of spectrum, creating a minimum of an additional 33% of Wi-Fi 2.4-gig capacity, while not harming existing Wi-Fi operations nor our ability to offer MSS services where and when required. The FCC has not requested additional technical information from the company. And after a thorough regulatory review, during the past two and a half years, we look forward to the conclusion of this process. Now I'll turn the call over to Rebecca to discuss the second quarter financials.

Thank you Jay and good afternoon everyone. As Jay mentioned, we continue to expand and strengthen our presence internationally as we leverage recent product certifications and additional sales and marketing resources to introduce our products and services to new geographic areas. We also have been successfully selling our existing product portfolio through a competitive sales commission as we reduced inventory levels in preparation for the introduction of second-generation products that we expect to be available next year. Our focus in these areas have resulted in 12% growth in our worldwide subscriber base since June 30, 2014 with significant contribution from markets outside of North America. Gross additions in these markets are multiples of our second quarter 2014 levels. As shown in slide two, total revenue decreased 4% compared to the prior year's quarter which was due to a combination of continued currency effects and a decline in revenue generated from equipment sales. Growth in revenue generated from our SPOT subscribers was the primary contributor to revenue for the quarter, but the change in foreign exchange rate since 2014 remains a predominant factor offsetting revenue growth. Due to our global footprint, a significant portion of our sales is generated internationally. Had there been no change in exchange rates since the second quarter of 2014, total revenue would have been $1.2 million higher. The 4% increase in service revenues during the second quarter of 2015 compared to the prior year's quarter was driven by higher number of Duplex, SPOT and Simplex subscribers. Average Duplex subscribers increased 20% from the second quarter of 2014 and gross Duplex additions in markets outside of North America were almost three times the addition in the second quarter of 2014. The incremental revenue generated from our increased subscriber base was offset by a decrease in Duplex ARPU. The popularity of our prepaid usage-based plans has resulted in a nearly 10% decrease in ARPU compared to the second quarter of 2014. Revenue for prepaid rate plans is just started upon activation and it's generally recognized only when the subscribers uses their device or their contract term ends. Therefore, an increase in subscribers is not necessarily commensurate with an increase in recognized revenue. Subscribers activating on prepaid plans accounted for all of the additions in certain markets in Latin America and nearly 90% of worldwide net additions. The remaining 6% decrease in Duplex ARPU is due to the impact of changes in foreign exchange rates as previously mentioned. SPOT service revenue increased $1.3 million from the second quarter of 2014. SPOT activations outside of North America grew almost 50% which contributed to the 11% increase in average subscriber base. A 7% increase in ARPU also added to the increased SPOT service revenue. Higher rate plans associated with tracking features on our SPOT Gen3 device were the primary driver of this increase. Revenue from subscriber equipment sales decreased $1.7 million in the second quarter of 2015 and margin from equipment sales decreased $350,000. Almost 40% of the revenue decrease and nearly all of the margin decrease resulted from a single equipment sale to a Simplex reseller during the second quarter of 2014 which did not recur in 2015. The remaining decrease in revenue was due to a reduction in the selling price of our Duplex handsets. In late 2014, we lowered the selling price and carrying value of our mobile units in order to generate increased sales in advance of second-generation products which we expect to be introduced in early 2016. Our global sales team had successfully leveraged the reduction in selling price which drove a nearly 90% increase in the number of phones sold during the second quarter of 2015 compared to the prior year's quarter. The substantial increase in the number of devices sold has contributed to the 20% increase in Duplex subscribers, as previously discussed. We also see this improvement as a relevant data point regarding the market's price elasticity. We believe this is an appropriate benchmark for our future products which we expect to be priced meaningfully lower than our legacy products. Net income fluctuated substantially in 2015 from the second quarter of 2014, due primarily to non-cash items, the largest of these item was an over $600 million variance in gain loss from the change in derivative valuation between the period. Other items contributing to net income for the second quarter of 2015 included lower loss in extinguishment of debt, as well as lower inventory impairments, depreciation and interest expense. Adjusted EBITDA was $3.2 million during the second quarter of 2015, compared to $5 million in the second quarter of 2014. This decrease was driven by lower total revenue of $1 million, coupled with $0.8 million increase in operating expenses, excluding EBITDA adjustments. The largest driver of the decline in adjusted EBITDA was an increase in MG&A expenses which were higher in the second quarter of 2015, due primarily to the bad debt reserves we recorded on aged commercial customer balances. Cost related to general organizational expansion, as well as other growth investments, including networking, gateway maintenance and sales and marketing expenses, were also higher. And now an update on the company's liquidity position. As of June 30 2015, we held an unrestricted cash balance of approximately $13 million and continue to maintain approximately $38 million in a debt service reserve account which is restricted to making payments towards principal and interest amounts due under the COFACE Facility. During June, we drew $14 million under our Terrapin equity line. In August, we secured an additional $75 million equity line commitment from Terrapin which we can draw over a 24-month period. Our contractual obligations over the next 12 months include primarily debt service payments and amounts due to our ground vendors for work being performed to upgrade our gateway infrastructure. Debt service amounts increased semi-annual principal payments due under the facility agreement in December 2015 and June 2016 which totaled approximately $20 million, as well as semi-annual interest payments joined to the facility agreement and subordinated notes which in the aggregate are also estimated to be $20 million. Our ground-related cash obligations are expected to be $18 million and turn in the next 12 months. As previously disclosed, we have been working with our lenders to make certain modifications to our facility agreements. And this month, we executed an amendment that clarified ambiguous language in the agreement related to certain definitions. Adjusted formula, by which equity cure contributions are calculated, extends up to two years to June 2019, the date for which equity care contributions can be made and increasing the amount of capital expenditures we're allowed to make. As we've discussed with you previously, the facility agreement includes a mechanism which allows us to cure non-compliance with financial covenants with proceeds from equity financing of a minimum of $10 million. We refer to the proceed at equity care contribution. Additionally, Thermo has provided a backstop through 2019 of up to $30 million in equity financing to the extent the Terrapin line is unavailable. In summary, we're encouraged by the growth in our subscriber base, both in traditional markets and in markets outside of north America. Our sales of mobile units and SPOT devices are increasing rapidly as compared to the second quarter of 2014. Our operating metrics are trending upward in most categories, even though our topline results continue to be burdened by the strengthening of the U.S. dollar in recent quarters. We're also investing and expanding our organization to support future growth in our business, as well as product development. I will now turn the call back over to the operator for Q&A. Operator?

[Operator Instructions]. Our first question is from Steve Sweeney with Elevation. Please go ahead. You may now proceed.

I was wondering if you could just talk a little about the NPRM process and sort of where it is right now. I just look at the Ex Partes and it looks like they are moving sort of from the bureaus to more of the staff of the Commissioners and I guess is that indicative of where we're in the process wining, is the order now from International Bureau and the Wireless Bureau, is that headed towards the Chairman's office or should we expect some type of a ruling in the next few months. I guess as far as now you got control over the process, but where are we, in your eyes, in the process?

Steve, I think first and foremost, we completed the demonstrations at the FCC and those were very successful and those were extremely important to the Bureaus, because it allowed them to conclude the part of the process that they had been so involved in and have been handling for the last year or so. That process concluded, the test data was put out by us, it was put out by the FCC itself and clearly it demonstrated that there was no interference between Channel 14 and Channel 11 which would impair the use of Channel 11. So that was important and that has been completed. Now, the process is one where it moves from the Bureaus to the eighth floor and it's now up to the Chairman to decide when he wants to move the NPRM to a final order.

Could I just ask - I mean make sure, so it's left the Bureau level, it's gone past the Bureau level and now it's going to the churn or--?

No, we can't say Steve with clarity exactly where it is and shift it to next step in the process once the technical work is completed, is for it to move to the eighth floor. Because there were no technical problems that were identified by the Bureaus, I suspect that the Bureaus have made that known to the eighth floor. So if somebody wants to lobby pro or con, the natural place for them to go is now to the eighth floor and that's why I suspect that some of the filings that have been made, including meetings, have been taking place, whether they are our meetings or parties that are against us or other parties are taking place at the eighth floor level and less so now at the Bureau level. Now as for the time it takes to go from here to there, we know that they are working hard on it and by all of the things that the FCC has been involved in, in the last 12 months, clearly they're doing a lot of things. And this is a quiet period in Washington generally, so it's a little bit quieter in our docket as well, but we do hope that it moves promptly from hereon up.

In the past, say, over the past six months, there's been a few like sort of high-profile FCC initiatives like net neutrality, the Comcast deal, the AWS re-auctions and all the skews that happen with the designated entities. Most of those things have been resolved. I guess my question is, in your mind, is there any like really big high profile type FCC projects or something that's really sucking up all their time and their highest priority right now, so that this kind of gets put in the backburner, because that was the case before, that was the case - to be fair, it seemed like the FCC has had much higher priorities the past six months, but most of those things have been cast off the list. So I guess my question is, is there some big project that the FCC or some initiated - a priority that you think they have right now that is distracting them or causing them to the lag?

Well, I don't know that anything is causing them to delay per se, but the complexities of the incentive auctions are substantial and it does involve things from the Wireless Bureau, as well as the Office of Engineering and Technology, as well as of course, the Commissioners themselves. So they're always things going on, but should they be able to slot us in and reach a conclusion on the TLPS matter, we certainly hope so. We know that they are trying, because we speak to them frequently, but there are things that compete for people's time. And there's no getting around it, that's just the reality. But, I hope that we're closing in on the end of the process. We're certainly doing everything that we possibly can daily to make sure that any information that they need they get and they get promptly and we hope that we're nearing the end.

Our next question is from Kevin Roe with Roe Equity Research. Please go ahead. Your line is open.

A couple of questions on the financing side. The new Terrapin facility, could you give us some more detail there, is it substantially the same basic terms as the old Terrapin draw facility?

Yes Kevin, the basic structure is the same to the original line, the discount has been reduced some. So, the total discount can be as low as 2.75% and as high as 4%. So, slightly better pricing. But obviously more availability. $30 million was the last line. This is up to $75 million. In pricing it's a little bit better, the structure, otherwise is similar.

And until what period can you utilize this facility?

It's 24 months from now. So August of 2017.

And the Thermo $30 million line that you mentioned, in case Terrapin is unavailable, why would Terrapin be unavailable during that 24-month period or you wouldn't consider using Thermo as incremental financing, it's purely in case Terrapin is unavailable?

That's correct. There is no significant provisions for Terrapin to get out of their commitment. But just in case there is some issue, then Thermo is there to backstop $30 million of the $75 million. Kevin, one last point I'd like to make on the $75 million. We obviously want to have cash in the company, so that - and available on the best terms possible and used only when we need it in the company. But there are certainly some things of interest that could come out of this NPRM which would yield additional requirements for the company. I mean we just want to make certain that we have in fact a shelf there to handle those things promptly if opportunities present themselves.

[Operator Instructions]. Our next question is from Lyman Delano with Beck, Mack & Oliver. Please go ahead. Your line is open.

Late last week there was an announcement from the NASA Langley Research Center about a contract between ADS-B Technologies for an ALAS system utilizing the Globalstar System. And I just wondered if there are any significance to this announcement as it relates to Globalstar?

Yes, I think, Lyman, it is important. The whole idea of ADS-B of course is that we're able to deliver one second tracking globally for airliners essentially, but also for corporate and general aviation aircraft. Anytime a government entity takes interest in the product, it is important to us. The folks at ADS-B Technologies have been working with NASA for some time and NASA has their own reasons for wanting to test ADS-B over satellite using this ALAS system that we described and we hope that it is the beginning of many more opportunities like that. Exactly all of the reasons that NASA wants to be using ADS-B, I think can be better directed to our partners in Alaska than to Globalstar because they have been more involved. But we're very, very pleased with what this means on top of what's going on with Lockheed Martin right now.

We have no further questions at this time. I would like to hand it back to Jay for closing remarks.

Thank you everybody for joining us today. I appreciate it. We look forward to talking to you again in another 90 days and expect a lot of activity in the company in Washington DC in connection with additional experimental licenses and so forth with people that we're working with for TLPS, all of which should make the next call very interesting. Thank you very much.