Globalstar, Inc. (GSAT) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2017 Globalstar Incorporated Earnings Conference Call. My name is Fiona and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now like to turn the call over to Mr. Jay Monroe, Chairman and CEO. Mr. Monroe, you may begin.

Good morning. And thank you for joining us to discuss our Q1 results and operational highlights. Following my prepared remarks, Rebecca Clary will provide an overview of the quarter's financial results followed by Q&A when Tim Taylor will also join us. Please note that today's earnings call contains forward-looking statements intended to fall within the Safe Harbor provided under the securities laws. Factors that could cause the results to differ materially are described in the forward-looking statements section of Globalstar's SEC filings and in today's press release. This release which is available on our website also includes a reconciliation of the non-GAAP financial measure adjusted EBITDA to net income and loss, its most comparable financial measure calculated under GAAP. After the operational discussion, I will provide information on the status of our international spectrum progress. Our drive to continue the growth of the core satellite business resulted in adjusted EBITDA increasing 23% over the first quarter of 2016. This came on the back of significant service revenue increases, which were in large measure from the increases in ARPU, in both our SPOT and Duplex offering, and continued expansion into new markets. Our operations produced meaningful top line growth with a 13% increase in total revenue and continued improvement in ARPU across all of our major revenue types. Duplex ARPU was up 26% during the first quarter, contributing significantly to the increase in adjusted EBITDA. When we have our new products, which are running behind schedule, we expect to continue the significant increases in ARPU and EBITDA. The development effort of our new one-way and two-way products is continuing with teams of both internal and external resources. And we look forward to rolling these out in the near future. We have demonstrated again that we can leverage our current operating expense base by adding high margin service revenue, while we see value in equipment margin, our business is best served by selling as much capacity as possible on the network. Also, while Rebecca will elaborate on this in her remarks, we have previously said that we will execute a financing this year. The final amount and timing for this is dependent upon finishing the negotiation with our senior lenders, which is currently moving forward. And at this time, we are targeting approximately $150 million to be raised this year. Based on discussions to date, we are highly confident in our ability to raise the required capital which will provide runway beyond 2017. The financing will be used for principal payments that will reduce leverage in addition to funding interest and other debt costs. Thermo is committed to being our participant in any such arrangement as we have been for nearly every Globalstar financing. Now, let's turn to spectrum. We are of course pleased with the FCC process and that it resulted in a favorable outcome in the United States. And we're proceeding with efforts to affect global approvals. The final rules adopted by the FCC provide for either or both indoor or outdoor small cell services that provide a high quality solution to address increasing capacity requirements across all wireless networks. We believe that a dedicated small cell band is well positioned as network densification intensifies over the coming years. Indoor and outdoor small cells are applicable to existing carriers as well as to new market entrants both in the U.S. and abroad. Whether indoors or out, a small cell rollout is the best architecture to take advantage of the propagation attributes of the 2.4 GHz band and to also take advantage of the evolution of chipsets and spectrum aggregation architectures, which are now compatible with our spectrum for LTE. Our Globalstar's band may operate on a standalone basis. Aggregation technology eliminates the orphan band risk since spectrum can be bonded together in ever larger slots. Our propagation together with advanced aggregation techniques allows our spectrum to operate effectively within the networks of any partner. For a carrier, dedicated small cell LTE capacity over our 11.5 MHz offers a set of physical and regulatory advantages that provides substantially increased capacity and throughput without macro tower interference. Since FCC approval only a few months ago, we have initiated the process to secure long-term partners in wireless, cable and tech in both U.S. and around the world, who are interested in having dedicated small cell capacity. Some of these companies previously tested and have existing relationships with us, and thus are more knowledgeable than others on the details of the spectrum. For a new market entrant, this band provides an LTE service in urban and semi-urban environments with significant ecosystem, and cost and timing advantages, allowing for a license service when many of these companies have been generally limited to unlicensed spectrum or a combination of unlicensed spectrum and MVNO arrangements. We initiated our international regulatory work in January, and are executing the plan to seek approval for 16.5 MHz between 2483.5 and 2500 in various jurisdictions around the world. While each country is unique, the general process to obtain terrestrial authority is largely consistent. To assist us in this effort, we have retained the professional services of multiple legal consulting and engineering firms with the expertise needed to support such an effort. In most instances, these include in-country personnel who have the direct relationship with local regulators. No single firm can be the best everywhere, so our teams are picked for where they have indisputable expertise and deep historical relationships with regulators locally. It is paramount to have experts with both in-country experience and an in-country physical presence. As I previously reported, we have identified over 100 initial countries in which we are interested in pursuing terrestrial authority and are conducting preliminary assessments in each to determine the feasibility of obtaining our desired authority. The bulk of these assessments have already been completed revealing where we should focus our resources to obtain the earliest and greatest number of international approvals. As of the end of Q1, we have filed applications for terrestrial authority in countries covering over 375 million people. When the U.S. population is included, the total population covered would be about 700 million, representing approximately 10 billion MHz-POP. In general, we only file an application in the international jurisdiction after having directly met with the regulator to discuss our request and reach an understanding regarding the regulations by which they will consider and then process our request. We have met with numerous agencies, and they have been pleased with the reception to date by the international equivalent of our FCC. Since our petitions are in line with long-held policy goal to create harmonized spectrum bands across national borders. We believe the value we bring to global consumers in addition to the value placed on spectrum policy from harmonization by these regulators will help drive the approvals. Our goal is to have one terrestrial band harmonized globally, which is very unique. And we expect to file additional applications for terrestrial authority in new countries throughout the remainder of this year. And I look forward to updating you on our progress during future earnings calls. Now, I'll turn this call over to Rebecca, who will provide a more detailed overview of Q1 financial performance. And I will rejoin at the Q&A.

Thank you, Jay. Good morning, everyone. We generated another consecutive quarter of strong revenue growth with total revenue of 13% from the first quarter of 2016, resulting primarily from increases in ARPU across all four revenue streams. While equipment revenue was in line with the prior year's first quarter, total service revenue increased significantly, up 15%, due primarily to growth in Duplex and SPOT. The 20% increase in Duplex service revenue resulted almost entirely from higher ARPU. This ARPU growth was due to a combination of factors, including new subscribers, selecting rate plans higher than our current blended ARPU level, the discontinuation of certain lower-priced rate plans, increased revenue from prepaid usage based contracts and a greater number of revenue generating subscribers in the base. With maximizing high margin service revenue as our focus, we have executed on several initiatives over the past few quarters, including designing our sales promotions to require high ARPU plans upon activation and adjusting rate plans to ensure they are appropriately priced and consistent across the base. To that end, we have increased Duplex ARPU by 26%, while maintaining a loyal customer base. Partially offsetting the ARPU increase was a 5% decline in our average subscriber account. This decrease reflects those of tighter collections process that promptly deactivates non-paying customers, and fewer activations as higher entry rate plans are required for service. We also recognized higher SPOT service revenue, which improved 14% due to a 10% increase in ARPU and a 4% increase in average subscribers. SPOT activations were up this quarter on the heels of a successful holiday rebate campaign during the fourth of 2016, contributing to increases in both ARPU and average subscribers. Consistent with the trend over the last several quarters, these new subscribers were primarily activating our SPOT Gen3 device, which is our newest generation of this product and carries a rate plan higher than our other SPOT products, also causing the increase in ARPU was higher pricing across much of our customer base due primarily to the migration of legacy subscribers to current rate plan. We reported a decrease in net loss from the first quarter of 2016 due primarily to the fluctuation in derivative adjustments in the respective period. This fluctuation reflects changes in underlying assumptions used to calculate our derivative value, including stock price volatility and the remaining terms of our notes. Other non-cash items and higher revenue also contributed to the decrease in net loss. Adjusted EBITDA increased 23% during the first quarter of 2017, due to an almost $3 million increase in total revenue, offset partially by a 10% increase in operating expenses excluding EBITDA adjustment. The 15% increase in service revenue was the primary cause for the increase in adjusted EBITDA. This trend in high margin service revenue, driving significant adjusted EBITDA growth has continued for several quarters, even in the face of higher than normal operating expenses. We have worked diligently to design our next generation of Duplex, SPOT and Simplex products and have experienced certain delays that have resulted in increased costs, while we finalize the design and functionality of these products. The expansion of our engineering team, including leveraging outside expertise has resulted in incremental cost, representing nearly 40% of the total increase in operating expenses. While R&D efforts are embedded as part of our ongoing core operations, we do not expect the current run rate to continue after these products are launched over the next 12 months. Switching gears to liquidity, as of March 31, 2017, our sources of liquidity include cash flows from operations, an unrestricted cash balance of $23.5 million and $38 million in a restricted debt service reserve account, which will be used as long term source of liquidity for principal and interest payments due under the facility agreement. Projected contractual obligations over the next 12 months consist primarily of debt service payments due in June and December. These amounts include principal payments due under the facility agreement of $76 million, interest payments due under the facility agreement and subordinated notes of $24 million and a payment of $21 million for the balance of fees relating to the 2013 facility amendment. We expect to fund these obligations by raising equity or equity-linked capital, and are currently evaluating various financing alternatives. While the exact amount is unknown, we expect to raise sufficient capital to provide us with runway beyond the next 12 months. In connection with these capital raise efforts, we are also in discussions with our senior lenders regarding amending certain terms in our facility agreement. We expect these modifications to include a requirement to raise a minimum amount of capital this year, while also addressing certain longer-term provisions in the current agreement. Although, we cannot make assurances on either front, we look forward to announcing a financing and an amended facility agreement in the near future. In summary, we are pleased with another consecutive quarter of improved financial results led by growth in high margin service revenue. We have previously discussed the need to augment our current business model in order to realize higher revenue, particularly while we await new products. And our ongoing initiatives have demonstrated our ability to achieve this global. We understand higher profitability from our service contracts has a direct and meaningful impact on our operating results. And therefore, this will continue to be a principal focus area for us. We envision continued growth coming organically through product development and expansion into new markets. With that, I will turn the call over to the operator for Q&A. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from John Petrozzi from Muller Road Capital.

Hey, Jay.

Hello, John. How are you?

I'm good. I'm good. Thanks. Appreciate the call. I was wondering if you can make any comments just drawing the parallel between kind of bidding more than that seems to have broken out over the straight-pass [ph] assets relative to the GSAT assets, and well, not comparable in terms of placing the band. How you think about that from the larger macro sense of capacity constraints, spectrum constraints and now that there is really no more auctions in the future? And all additional spectrum being held in private hands, what that kind of means in your strategic thinking as you go forward?

Well, I think, what it shows without a doubt is that licensed spectrum matters. There is much ado of - and we've heard it for years and years and years about how the 3.5 band will obviate the need for licensed spectrum, but this clearly not the case. The XO acquisition a year ago was to get millimeter wave spectrum. Obviously, what's going on today in the transaction that you were talking about is all about licensed spectrum. So people can talk their own book on unlicensed as much as they like. But the proof is in the pudding. And what's happening in the market is that licensed spectrum is being snapped up. When you look at what happened for spectrum that is closely situated to us from a propagation and a capacity carrying perspective, you have to go to the AWS-3 auction. I mean, it was clear there was not a scrap of that that was left un-purchased. And I think that's just the reality, big carriers and big cable companies need to have their services secure and over licensed spectrum, and that bodes well for us. I don't think that's any different in the United States than it is elsewhere. And it's not to say that unlicensed spectrum doesn't get used, because it does - I mean, we all live on Wi-Fi every day, but can't run a service that you want to charge out reasonable amount of money for over unlicensed spectrum. We saw that also in the whole white space area over a few years, the white space was going to be the savior, right, long distance Wi-Fi. And it just never really developed, because it's unlicensed. So I think that's the critical take-away from the one that we're watching right now. And the second take-away of course is that there are a lot of people that are - and a lot of companies that are involved in that transaction they've identified to, but we know for a fact at the beginning of that process, which yielded the first AT&T deal, that there were three involved in it. So it's just not a one-off situation.

Right. Okay, great. Just one follow-up if you'll allow me. As far as the capital raise goes and kind of follow along the numbers in terms of liquidity and having a little extra to get through the end of the year, et cetera, Thermo, you have been very, very supportive of this enterprise for a long time now. Is it accurate to assume that if the financing happens to go the way of Thermo or Thermo and a strategic partner that Thermo would most likely retain its pro rata share of ownership in the company?

I think, yes, I do. And it could be - there could be some rounding that's a tiny bit different if there was another participant that was a strategic involved in something like that. But, yes, we would expect to retain what our percentage in the company for sure. And if you look at it now, what we're talking about raising is so limited that that the relative changes in ownership are modest if - almost, no matter how you share the percentages of a new raise, the company is large enough, the market cap is high enough and the dilution low enough that it's not going to have a material impact on us.

Yes, and I guess, just to add to that, it would leave very little overhang in the stock from a, quote unquote, issuance perspective, so just to point that out as well.

Yes, we definitely agree. And we don't see this as a difficult issue. We see it as an issue, something you have to do and something you have to work through. But everyone knows from past experience that the relationship we have with our banks is excellent and we have cultivated that for a decade now. And it pays great dividends to us when we have to go back and have a discussion with them about massaging some terms or conditions in the loan agreement, which we've done a couple of different times and always with an excellent result for the company. So I think it's - I think it will all work out just fine.

Good, perfect. Thank you very much. I appreciate it.

[Operator Instructions]

It looks like we have no other questions this morning. Thank you all for joining. We appreciate the time. We will get back together again in roughly another 90 days and bring you up to speed on where the company is at that time. Thank you all for joining.

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