Globalstar, Inc. (GSAT) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Globalstar, Inc. Second Quarter 2017 Earnings Conference Call. My name is Adrian, and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Globalstar. Jay Monroe, you may begin.

Good afternoon, everybody and thank you for joining us to discuss our Q2 Results. 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 earning 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 statement section of Globalstar's SEC filings and in today's press release. Let me say right from the outset that the second quarter has been very successful for us. Our total subscriber count surpassed 700,000 and we also achieved our highest quarterly EBITDA in 10 years, which increased 61% year-over-year and 51% sequentially. Revenue grew over the second quarter of 2016 largely due to increased ARPU in both Duplex and SPOT as well as improvements in the SPOT subscriber base. Equipment revenue was down slightly year-over-year, which is likely to be a continued headwind until we introduce our new products to the market, now expected early next year. We have made some operational improvements and personnel changes to refocus the product development efforts, and believe we are back on a solid path after experiencing frustrating delays. Adjusted EBITDA margins during the quarter were up substantially from last year. This margin expansion partially reflects the high operating leverage inherent in this largely fixed-cost business, but it also shares the team's great cost discipline as we manage to reduce operating expenses year-over-year despite numerous initiatives we are pursuing to enhance the long-term value of our asset, including our spectrum. While this quarter's EBITDA growth is unlikely to be consistently repeated, in part due to seasonality, it's a clear marker for us that we provide a necessary and critical service, and with the right products the potential of our MSS business has substantial upside from here. No other satellite company is even approaching our level of growth, and we expect continued market share expansion when our newest versions of SPOT and Sat-Fi roll out. Let me shift to regulatory matters. As you know, the FCC issued its report and order, which became final and effective March 2 of this year. As specified in the RNO, in April Globalstar also filed an application to amend our MSS licenses for this terrestrial authority. The commission reviewed Globalstar's application, placed it on public notice in May with a comment cycle that ended July 11. And the comment cycle closed without opposition. This is actually not that surprising given the positive participation level in the process leading up to the effectiveness of the order. Globalstar expects the FCC to issue the license modifications within days. In addition to completing the final step in the FCC process, Globalstar has also pursued an ambitious international plan to harmonize the FCC's decision across multiple jurisdictions. We have previously announced filed applications in new countries totaling 375 million people. And we've met in country with the regulatory agencies in yet another 15 countries and are in dialogues that we expect to lead to many more filings this year. At a high level, while each jurisdiction is generally consistent, there are unique country-specific requirements, which we are working through with a large support team. We will meet with more regulatory agencies throughout the remainder of this year, and continue to work with our team of attorneys, engineers and consultants to harmonize the FCC rules internationally. While this process is not quick, we are making significant progress and we've developed a team and an expertise already second to none for global spectrum issues. On the strategic front, we have also been encouraged by numerous recent conversations with chipset and infrastructure providers, confirming their intentions to actively support this band, and we continue to work towards accelerating the path to commercial availability as the ecosystem develops. Last quarter, we gave a lengthy description of how our spectrum could be deployed in dedicated small cell service. We have made the point that in a downlink-dominated world, our spectrum in the TDD configuration is close to twice as productive as the similar amount of spectrum in FDD. In other words, our 11.5 megahertz is roughly equivalent to 22 megahertz of FDD spectrum. In the last months of meetings with potential partners, nothing has shifted our view regarding the strategy, and it has become especially clear that network densification will continue to dominate topologies. We are exceedingly interested in the continued evolution of 5G, and are confident that a significant enabler of 5G will be small cells. And furthermore, that a dedicated band of spectrum for small cells will be an integral part of most next-generation networks. The development of the small-cell ecosystem, the required density of new networks to support massive traffic growth, the physical characteristics of our spectrum and the competitive convergence are all coming together to make this a very interesting time for Globalstar. From a macroindustry perspective, the Straight Path bidding war, Crown Castle's purchase of Lightower, the ongoing discussions between various cable and wireless companies, recent fiber transactions by carriers including the announcement this week between Verizon and WideOpenWest, and even products like the Amazon Echo Shelf are all confirmation of the convergence that we have spoken about. All of cable, the wireless carriers, more traditional fiber and wireline providers and technology companies are fighting to develop dense network topologies, and to garner more recurring subscriber revenue. Video is now just as likely to be consumed on a mobile device as it is on a big-screen TV, and all such content needs to be fronthauled via spectrum, and backhauled via fiber. New emerging services like autonomous cars, augmented reality and mobile-edge computing, all benefit from these denser networks. Thermo is heavily invested in these trends through our ownership of Globalstar, our large and growing improving metro fiber business FiberLight, and a significant FB position in Level 3, soon to be CenturyLink. Across all of these investments, we are encouraged by the trends, and believe broad experience that Thermo has in the telecom industry will continue to be an asset for Globalstar. In order to take best advantage in unlocked considerable value we've built up in Globalstar, from our U.S. spectrum, our international spectrum and our satellite network, we are in partnership discussions with numerous companies. As we said consistently, we do not intend to build de novo terrestrial networks, so we are engaged in conversations with potential partners who already have or want to have such networks. While this process is ongoing, we will not be able to provide a great deal of additional detail. On another subject, and as you know, we successfully amended our loan agreement with the French banks at the end of Q2. We negotiated significantly enhanced terms, including financial covenant relief, and now have the ability to use equity cures in the event of any shortfall until the summer of 2020. Given the brief time between the signing of the amendment and the requirement for an equity infusion by June 30, Thermo invested $33 million in new equity, a substantial portion of which was used for early payment of accrued fees, which were actually due in the fourth quarter anyway. This additional investment by Thermo takes its total investment to over $650 million, and reflects our complete confidence in the value of the satellite business, our 2.4 spectrum and the other Globalstar assets. We can elaborate on this financing during the Q&A if people are interested in that. But now I'll turn the call over to Rebecca, who will provide a more detailed overview of Q2 financial performance.

Thank you, Jay, and good afternoon, everyone. The second quarter of 2017 marked another consecutive period of strong growth with total revenue of 12% driven by higher service revenue, almost 90% of which resulted from increases in Duplex and SPOT. Up 15%, Duplex service revenue was propelled by 23% higher ARPU, offset partially by a lower subscriber base. We have been successful in growing ARPU over the past several months by adjusting service rates while still offering some of the most competitive pricing plans in MSS industry. Several factors have been involved in this strategy, including the elimination of our lowest price entry-level plan, the phased migration of existing subscribers on legacy rate plans to plans in our current lineup, and sales promotions that encourage higher-priced, usage-based plans upon activation. To date, we have not experienced a heightened churn level or an unexpected impact on demand due to these adjustments. Partially offsetting the ARPU increase was a decline in our average subscriber count. This decrease reflects both a tighter collections process that more promptly deactivates nonpaying customers, and fewer activations due to lower selling sales, as we focus on maximizing the value of our remaining first-generation handset prior to the introduction of a second-generation device. SPOT service revenue also improved significantly from the second quarter of 2016, up 18% due to a 14% increase in ARPU and a 4% increase in average subscribers. The increase in ARPU reflects the changes we have made to our rate plans to simplify our service offerings by bundling tracking capabilities with our basic access plan. An increase in activations also contributed to higher ARPU as new subscribers joined the network on rates higher than our previous funded ARPU level. Successful rebate promotions have continued to generate strong activations and equipment sales as we await the new insurgence of our SPOT device. We reported a net loss during the second quarter of 2017 compared to net income in the prior year's quarter, due primarily to the fluctuation in noncash derivative adjustments. The derivative loss recorded in 2017 reflects primarily the significant appreciation in our stock price from March 31 to June 30, in addition to other underlying inputs and assumptions used to calculate our derivative values. Other noncash items and higher revenue partially offset the impact of this loss. Adjusted EBITDA increased 61% to $8.2 million during the second quarter of 2017, due primarily to a $3.3 million increase in total service revenue, as there were minimal changes in equipment revenue and operating expenses excluding EBITDA adjustments. As previously discussed, the 16% increase in high-margin service revenue was driven in large part by Duplex and SPOT ARPU growth. Maximizing the profitability from our service contracts has continued to be a principle focus for us and has had a direct and meaningful impact on our operating results. On a liquidity front, we ended the quarter with an unrestricted cash balance of $9 million and $38 million in a debt-service reserve account, which is restricted to making longer-term principal and interest payments under the facility agreement. Projected contractual obligations over the next 12 months consist predominantly of debt service payment. These amounts include primarily principal payments due under the facility agreement of $93 million, and cash interest payments due under the facility agreement and subordinated notes of $25 million. Furthermore, on April 1, 2018, the holders of our 8% convertible notes have the right to put those notes at a price equal to the principal value of $17 million plus accrued interest. However, these notes are substantially in the money given the current conversion price of $0.73. As disclosed last month, we completed an amendment to our facility agreement, which revised certain terms providing the company with more flexibility and less uncertainty in the long term. As Jay touched on, the amended provisions include most importantly the removal of the primary financial covenants until the end of 2018, and when we are required again to be measured against these covenant levels, we will have the ability to use equity cure in the event of a shortfall until June 30, 2020, measurement date. In exchange for amending these terms, we agreed, first, to accelerate the payment of the $21 million 2013 restructuring fee to June from December. Second, to fund the debt service reserve account such that affective October 30, 2017, the balance will fluctuate to equal the subsequent periods principal and interest payments. The estimated incremental cash flow needed to fund this account over the next 12 months is around $13 million. And lastly, to raise $147 million from June to October, $33 million of which was satisfied via the common stock purchase agreement with Thermo on June 30, simultaneous with the closing of the facility agreement. These equity proceeds will be used to fund our debt service obligations due that same day, including principal, interest and fees of $54 million. We are currently evaluating various financing alternatives to raise the remaining $114 million of capital required by the end of October, which will also be used, in large part, to fund future debt service obligations. To conclude, we are pleased with our financial performance during the second quarter of 2017. Adjusted EBITDA continues to grow, driven primarily by modifications in our pricing strategy, and our ability to be disciplined in managing costs. While difficult to expect adjusted EBITDA in the core business to continue to grow at such an accelerated rate, we expect that future growth will be driven by a combination of expanded market share from our new product rollouts, combined with continued growth in 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] And we have Jason Bernstein from Cantor. Please go ahead.

Thanks for taking the question. Just a quick question Jay. In all these discussions you are having with potential partners, is there any concern over the amount, the 11.5 megahertz, do they see that as any detriment? I know you mentioned that because the TDD is more equivalent to 22 megahertz.

Jason, actually that's not been a big discussion up to now with any of the parties that we are talking with. If you imagine that the purposes for this spectrum are in small cell configurations, maybe inside enterprise, perhaps in the house. Having a dedicated TDD channel of 11.5 megahertz, of course, is more than you can ever imagine happening to yourself in a house anyway. One of the challenges that people have at 600 and 700 and other spectrum is driving that capacity from a macro tower into your house. And over time they'll be able to do that to a certain extent. But if they do that, and it's going into everybody's house or everybody's business on the block, you have got the constraint that we all know, which is the total capacity available in that spectrum going through a single tower is relatively limited. Picture, in contrast, this spectrum, which is now 10 megahertz, but dedicated to you and your family, or 20 of your coworkers, or out on a strand and only going up and down the street, a short distance. But capacity available on 10 megahertz is really extraordinary. Also everybody knows that the configuration people are going to use is LAA going forward, and with a licensed piece of spectrum, ours, and opportunistically grabbing on to 5 gigahertz spectrum using LTE-U in 5 gigahertz is the kind of opportunity that increases capacity exponentially, and yet it's still anchored to licensed spectrums so get all the benefits of that. So I believe that the people that we're talking with have a full appreciation for those kinds of configurations I just described. And therefore, they're not, at least to our knowledge, are not worried about that issue at this time.

Great, thanks. I appreciated taking the question.

Sure thanks.

[Operator Instructions] And we have John Petrozzi from Muller Road Capital. Please go ahead.

Hey guys, how are you?

Hey John.

So I just - I know you've been having lots of discussions with people as you've referenced and the news wires, not too long ago, picked up that you had formally hired advisers to help with that process. I just wanted to get from your perspective, I hadn't seen anything out there confirming that. But it sounds logical to me that, that would be the next step based on the process that you've outlined over a number of months.

John, I don't want to comment specifically on the advisers, but let's talk about the issue that you raised in more sort of a more macro way. And that is, what are we attempting to get done here for the benefit of all shareholders. As you know well, those that have been shareholders in Globalstar for a longer period of time have heard me say 20 different times that we're all in this together. Thermo has invested more than $650 million and I live and breathe this issue every single day, all day. Many of our long-term investors have substantial sums invested and they spend a good deal of time every day worrying about many of the same things that I do. So in a sense we're all in it together. So you can imagine that anything that we could do, even some of the things that we can't comment to, that would enhance the value of this spectrum, and in fact, enhance the value of Globalstar for all shareholders, is what we're doing every single day. So it's logical to conclude that some of those reports that people have talked about or speculated on are true. Now in terms of actual conversations we're having with third-parties, although we can't talk about the specifics of the individuals that we're talking about, or 2 rather. I can tell you that in each and every case they fit into the general buckets that we've been describing for a while, and those are carriers, cable and technology companies. Each of those companies in those buckets have profound needs for additional spectrum. It's so obvious with the carriers, it's so obvious with the cable constituents. It's a little bit different with the tech guys, because they've all looked at this for a long period of time and they are engaging today around issues of connectivity in a manner that they never have previously. So it's an exciting time for sure for us. And again I emphasize that literally everyday this team of people comes to work in order to maximize the value of the company for you, for us and for our employees who are all major shareholders of Globalstar.

We appreciate it and it has been an exciting time listening to Charlie today on his call this afternoon, echoing many of the same things. And it seems like there are so many parties that are involved in trying to secure some kind of connectivity asset that makes it in line with exactly what you've said. Just on a second note on financing and the next raise, can you put some context around that for us? They were Thermo taking the step of making another investment in the company and dedicating more capital onto the enterprise. How do think about moving forward on the October raise?

John, we've raised $159 million for the full year 2017. We raised $12 million in early January, another $33 million at the end of June and therefore, have a $114 million that we have to raise by the end of October. When we look at that remaining amount compared to our current market Cap, it's less than 5%. So I think it's something that's certainly doable. We've been talking about it for a long time, so I don't think we're surprising any investors with the timing or the announced. Most of that will be used right away to pay down principals at the end of December, and then again in June of next year. So I think it's well defined. I think what we got for it in exchange for agreeing to do the $114 million improvements to ensure a periods and the improvements that we also get long-term on the covenants. More substantial, a couple of other provisions that we received flexibility on as well. So I think it ended up being a very good trade. In terms of the Thermo timing at the end of June, we agreed to over a couple of months, and everything came together with the amendment, I think, 2 days before the quarter. So we did not have a substantial amount of time to grow them into a fully marketed deals. Thermo was the only entity that was capable of funding the $33 million within 24 hours after signing the documents at the bank. So it was a pressing time at the end of the quarter but we got it done, it was accepted.

And then for the $114 million, will you do a more fully-marketed raise where existing shareholders might be able to participate?

That is the expectation. There is another route where we got to a more concentrated investment with one or 2 parties. But a more likely alternative is for a fully-marketed deal where that process would kick off at some point in either late September or early October, getting us plenty of time to meet the October 31 deadline. John, one last thing as a follow-on to the questions that you were talking about. You mentioned the call with Charlie Ergen today. And some of the other calls that have taken place in the recent past that deal with similar issues. A distinguishing factor, I mean a large distinguishing factor, when you're having a conversation with some of these companies, is their global aspirations, and there's not anybody else that has spectrum which can be characterized as truly global. Yes, we've talked about what that process is, to certify it elsewhere in the world and it's a lengthy process, but it's one that we know how to do, and we've got a terrific team assembled to accomplish it. But when you're having the conversation with one of those companies that thinks globally, this matters. It changes the nature of the conversation. And again, once they fully comprehend LAA, they're in situations where they think, okay, we've got a single asset that anchors a larger asset, which means that we can play in literally any market. And back 10 or 15 years ago, the only way you could go play in a new market was to build a whole network. So you got to build - you had acquire a spectrum band to build an entire network in a country consisting of expensive macro-cellular stuff. And the infrastructure that we're describing today is one where companies - tech companies, in particular, actually make money selling you an access point, which does what we're describing. And then in your home or your office, you're using your own backhaul and you're using your own electricity. And therefore, there's all the costs associated with building a macro-network that don't exist at all. So it does alter the nature of the conversation, from the conversations that I'm sure others are having with the same parties. And we all know that there's going to be a need for every piece of spectrum that can be found over the next 20 years. And so whether we find that solution today or a little bit of time from now, people look at, whatever they do, at these big companies as a portfolio of needs, and we satisfy some aspect of that portfolio of needs, we believe.

Just on that Jay, can you comment on the time essence to that equation there where different strategic partners you might be discussing, feel that they are under pressure to secure those types of assets sooner than later?

Well we certainly hope that there are several that feel that need at the same moment, if you know what I mean. So - but yes, there are certainly dynamics out there and we all know what those are. People say this carrier and that cable company has got this incentive or that incentive. And those articles that we all read, they're probably right. As you can imagine when you're sitting across the desk from one of those folks, that's unlikely what they're going to talk about. But we agree that there are a few things that are time sensitive. Fortunately, in a transaction that we might do around our spectrum, we're actually one of the smaller pieces of the puzzle that they're looking at. And therefore, I think it's something that is readily within everybody's financial capability, which is nice. I don't know that the same is the case with other parties that have a. Dish, obviously, has a very substantial spectrum position and so their conversations are many, many tens of billions of dollars discussions, and ours are not, which does make it a little bit more attainable for a lot of people when they think about filling out that portfolio of needs.

Got it. Thank you very much.

Sure.

And our next question comes from Jim McIlree from Chardan Capital. Please go ahead.

Thank you and good evening. Jay, I think in your commentary - it might have been you or Rebecca. You talked about seasonality for the operating business. And I'm just wondering if you could map out what seasonality looks like and that is Q3 versus Q2, Q4 versus Q3, et cetera. And does that typically just show up in ARPU? So what we're really talking about is subscribers, I don't want to say being stable, but the big change in seasonality is going to be exhibited through ARPU. Is that correct?

It's Rebecca. I would say that seasonality is reflected in those ARPU and subscribers, with third quarter being our strongest quarter, second quarter probably ranking second, and then fourth quarter and then first quarter. Kind of in that order generally. So ARPU is going to be higher in those seasonally strong quarters because usage is up. But then also when we talk about our prepaid usage-based plans, any breakage from that plan is recognized on the anniversary date of that contract, which generally falls in those quarters as well because that's when the subscribers initially activated on the network and started their contract.

Okay. So since Q3 is better than Q2, it's reasonable to think that ARPU can increase from here in Q3? I mean Q2 was pretty strong.

Yes, Q2 was very strong. And generally speaking, of course they can't predict things like churn. But generally speaking I would expect third quarter to be slightly stronger than second quarter.

Okay, great. And then on the spectrum. I'm just curious how linked the spectrum value is to deploying a full-blown 5G network? Is it mostly dependent on that or is it - do you not necessarily need a 5G deployment in order to modify the spectrum?

Jim, definitely you don't need a 5G to deploy it at all. When I referred in the prepared remarks to 5G, it was really how we anticipate 5G networks will actually function. And when you look at a piece of licensed spectrum connected to a 5G network, there are couple of ways that we anticipate it will be used with 5G. I can go into those but they're technical and they're not - I'm happy to do it if you want we can go to a follow-up question on it. But in the interim since 5G –is going to is going to come from multiple different flavors and nobody knows precisely even how to define 5G today. When I was referring to LAA, I'm referring to things that are here now in the system and available. There's another concept that you're familiar with I'm sure, which is just called carrier aggregation, which I sure can think of as spectrum aggregation whereby a piece of our spectrum is married up to any other piece of spectrum. And if you've got 10 megahertz of ours and 10 megahertz of something else, they operate as if they were a coherent 20 megahertz. And the way that the physics of all of this works, 20 megahertz in that configuration is greater than 2 10 megahertz pieces. So whether we are carrier aggregation or whether we are our spectrum tied to LAA, both of those uses are now. And when we're talking to carriers, cable and tech, they're looking at those uses now. The further tie of this spectrum to 5G is just where it will all evolve. We anticipate, that's icing on the cake to these people. Everybody is looking at what they can do now and the spectrum can do those things I just describe this moment.

Okay, that's very helpful. And just a little bit more on that. So Jay, you were talking about how the spectrum could be integrated into different networks, and it sounds like much of this will be an engineering challenge. And so my question is, in your conversations, are they mostly with engineers and that group trying to figure out how the spectrum might fit into future network deployments, or is it more with the finance guys who are saying - or the strategic guys or the finance guys. I'm just trying to understand where you are in the discussions, who your counterparts are, what functions they have?

Well we're meeting with people all over the map in these companies, some of them sit in the highest chairs in their companies. Many, many, many have - are engineers that we've been working with for a long time, and we'll continue to work with those engineers, of course. But these conversations have been elevated. No big surprise. We got it approved in March. And so now people look at this and it's a real asset that's been approved and it's now something that they can focus on. And so whether it's in the engineering level where we have been for a long time or more senior people. People are focused now across organizations, looking at this opportunity. You'll recall too, that in April, the shackles came off of all of these companies who were not permitted to talk to each other during the course of the 600 auction. And so now these conversations have begun in earnest and fortunately we were approved right before that, and so we are a part of those conversations at this point. And they are happening top to bottom in these organizations, and we're supporting those meetings literally every day.

Okay, that's very helpful. Thank you, guys, and good luck with everything guys.

Okay, thank you, Jim.

That concludes the question-and-answer session. I'll now turn the call back over to Jay Monroe for final remarks.

Well thanks, everybody, for listening in to the second quarter call. As Rebecca said and I did previously, we are very, very pleased with our financial results. We are very pleased with the strategic discussions. We are 100% aligned with the interests of our minority shareholders, and those minority shareholders include every one of Globalstar's employees and so we're collectively looking out for everybody. Appreciate your time and look forward to talking to you again soon.

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