Globalstar, Inc. (GSAT) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Q4 2017 Globalstar Incorporated Earnings Conference Call. My name is Darrow, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator instructions] Please note that this conference is being recorded. I'll now turn the call over to Jay Monroe, CEO of Globalstar. Jay, you may begin.

Good afternoon, and thank you for joining us to discuss Q4 and full year 2017 results. Following my prepared remarks, Rebecca Clary will provide an overview of the financial followed by Q&A when Tim Taylor will also join us too. 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. We reached several milestones in 2017 as a result of the hard-working people in our satellite business, including that the subscriber base exceeded 700,000 and our spot product facilitated its 5,000th rescue since its launch. Demonstrating how essential our technology and services are to our customers, ARPU also significantly increased during the year, driving improved financial performance. For the fourth quarter, revenue grew materially compared to Q4 of 2016 contributing to growth of over 70% in EBITDA. For the full year, revenue and EBITDA were both up significantly. More on this later from Rebecca. Like last quarter, we should caution against expecting this trajectory to continue unabated, but we are encouraged by the progress made on the MSS business and are excited to see so many of our current initiatives bearing fruit. I'd also like to take a moment and welcome back Dave Kagan to Globalstar. Dave rejoined the team in early December as President and COO and will be responsible for driving the MSS business forward. He's hit the ground running and has the full support of the entire management team who has worked with previously. If I can reflect just a bit to help frame where we are today and where we're going as a company, I think it's important to position Globalstar through Thermo's investment lens. We first invested in Globalstar more than a decade ago and while Thermo's history is characterized by largely unlimited investment horizons, opportunistic timing, diverse industries and our long holding, I would have never thought at the beginning of the Globalstar investment that any investment would consume so much of my time and capital. As time has marched on, Thermo has always been willing to invest the necessary money and effort when needed because of our abiding belief in the satellite business and the spectrum. Along this journey we have always tried to make sure investors clearly understood our long-term vision of this value. While we have been right on most fronts, we've also gotten the timing of several events wrong along the way, but we have remained frank and upfront in our communications about all things. We were all relieved when we finally got through the long FCC process and expected that the world would embrace us and a partner would be secured within a short time post approval. The history of spectrum monetization is certainly best characterized as episodic and predictions can prove elusive. An immediate deal for Globalstar obviously did not happen. Instead, surprising to us, Straight Path, shortly after a very challenging period for them, ended up being sold following a bidding war that few if any one anticipated. We've always focused on initiatives under our control and have continued to work hard every day to improve the assets and the likelihood of success. We got through the license modification with the SEC in August, another process that took longer than expected. Again, this could've been a moment when our prospects for a partnership were right, but after numerous conversations, nothing materialized. The initiation of 3GPP came next. We kicked off that process last December at the Lisbon meeting and this work continues now in Athens. 3GPP is currently very focused on 5G and we're the only conventional spectrum band on their plate at this time. So, we do expect good progress over the balance of the year. After we get through 3GPP, we will have passed yet another major milestone, important to developing a long-term partnership. As other hurdles come our way as they surely will, we will continue to get over them. Our confident in the technical efficacy of this asset was further validated by the work Nokia executed throughout 2017. The conclusion from their study was that our clean spectrum generates significantly greater capacity with less infrastructure. This lowers deployment costs both indoors and outdoors as compared to baseline and mid-band spectrum when limited by macro to a small cell interference. This has been further validated by discussions with companies we are working with on the development of indoor small cell LTE solutions. According to one provider, nearly half of their engineering effort and a significant amount of the upfront cost is spent contending with macro interference issues and its implications. In many floors of office buildings where high-value subscribers spend most of their time, the noise floor is rising materially. Using the same spectrum for both coverage for macro towers and the small cell densification layer is a decidedly suboptimal scheme and we believe that the wireless world will evolve to value dedicated to small cell spectrum. We are eventually going to successfully monetize this spectrum in the U.S. and abroad and we're working around the globe to harmonize Globalstar's terrestrial authority, so we can do so. Last year we began an aggressive effort to obtain terrestrial authority throughout the world. To date Globalstar is met with the relevant communications regulatory authorities in over 30 countries to obtain receipt of terrestrial authority over our 16 megahertz of licensed S-band spectrum. We received our first international approval late last year and will expand from there. We are extremely pleased with the reception regarding our terrestrial plans and have already filed or in the process of filing applications for authority in countries representing nearly 800 million additional people. At 16.5 megahertz this is another 13 billion megahertz pops. In many developed and developing countries there are significant efforts underway to free up government or other licensed spectrum below 3 gigahertz. We are already a part of many of these efforts and expect to receive additional terrestrial authorizations this year. We'll update you as those events occur. When we don't yet know who we will partner with in different countries, we do know that obtaining the authorities provide significant optionality. With global harmonization, we will achieve the creation of an asset that is unique in the communications industry, a commercially licensed global spectrum band available for terrestrial mobile broadband services held by a single company. I think that in the years to come, Globalstar story will be reminiscent of the ugly duckling and this story isn't only about spectrum assets, but also about the satellite business. I'm sure you all read stories of Chairman Pai supporting Elon Musk's new Leo Constellation. We've been impressed with Musk's accomplishments across so many industries in so little time and are in awe of his ambition. He might be the only person more ambitious than Greg Wyler, a good friend of mine. Ultimately what Musk and Wyler want to accomplish is high-bandwidth to fix devices around the world. In practice given the high spectrum band they use, the satellite link budget realities neither intend to provide mobile services. For remote areas without access to wireline broadband, this will be a great achievement, but there is still a large market for small and inexpensive devices providing mobility around the world, the market that Globalstar serves, which will be enabled by our new suite of second-generation products. We're in beta testing now on Sat-Fi# and SPOT X. Can't wait for those long-overdue products to be out in the world. Dave Kagan and the rest of the satellite team are also working on some very interesting new used cases for the satellite constellation in the IOT world, which we hope to share with you soon, perhaps during the Satellite 2018 Conference next month. Across the company, we are expanding our geographical footprint and product offerings, adding new gateways such as Ole Miss and adding management and engineering talent. Combined these efforts have even required the company to expand to a new headquarters location late this year. Shortly we will begin commercial sales in Japan with joint venture partner, IPmotion and this is the first of many new countries we are entering. To say the least, we are all in on the future of Globalstar. Let me turn the call to Rebecca who will review the financials and then we both look forward to the Q&A.

Thank you, Jay and good afternoon, everyone. We've shown another quarter of meaningful growth in our core MSS business as we expanded our total subscriber base and generated higher ARPU. These increases drove 21% revenue growth when compared to the fourth-quarter of 2016 and a 16% increase on an annual basis. Focusing on quarter-over-quarter financial performance, total service revenue also increased significantly up 24%, resulting from growth in all of our primary revenue streams. Duplex service revenue, which was up 25%, was driven primarily by the nearly $12 increase in ARPU. The increase in ARPU among our 71,000 Duplex subscribers was due primarily to rate plan changes across our portfolio of customers. New subscribers are activating on these higher service plans which are above our current bunded ARPU level. While legacy subscribers are being migrated to these new plans upon contract renewal. Although annualized churn was down growth activations were also lower this year due to slower equipment sales as we had lower phone inventory available for sale. While lower activations have driven a 7% decrease in average subscribers compared to 2016 we are being as opportunistic as possible as we manage our remaining phone inventory by offering new and refurbished units at discounted prices and exchange for a rate plan higher than our current entry-level plan. Our enhanced focus on maximizing service revenue has clearly had a direct and meaningful impact on our operating results, measured by the 34% increase in Duplex ARPU from the fourth quarter of 2016 and a significant increase in adjusted EBITDA, which I'll cover in a minute. Spot service revenue improved 27% during the fourth quarter of 2016 due primarily to a 20% increase in ARPU. The ARPU increase reflected higher pricing across much of our customer base as we revised our service plans to bundle certain options resulting in simplified but higher rate plans. Similar to Duplex, our spot subscribers are activating on higher price plans compared to one year ago and our legacy subscribers are renewing on these higher rates. Also driving the increase in spot service revenue was a 6% increase in average subscribers as our gross subscriber additions remained strong during 2017 despite higher service pricing. The increase in service revenue was offset partially by a decrease in revenue generated from subscriber equipment sales, Most of the decrease was due to declines in the volume of Duplex and spot equipment sales during the fourth quarter of 2017. We were challenged by a lower supply of Duplex handsets this year as previously discussed and we experienced lower demand for our spot products following two strong quarters of sales driven by successful summer promotions during 2017. Demand for both types of products was also impacted by our dealers and retailers anticipating the launch of new products in 2018. At Jay mentioned, we are currently in the final stages of testing these new products and giving the delays experienced to date, our existing and perspective customers are anxiously awaiting their launch. Net loss decreased from the fourth quarter of 2016, due primarily to changes in derivative violation adjustments. Our derivative values can fluctuate widely based upon various inputs, but primarily are driven by changes in our stock price on the beginning and ending dates of each reporting period. Unlike the prior year, there was a decrease in stock price in 2017, which drove the liability down resulting in a gain, also contributing to a lower net loss with higher revenue offset partially by non-cash asset impairments recorded during the fourth quarter. Adjusted EBITDA increased 70% reaching its highest fourth quarter level since 2006. This growth was due primarily into a $5.2 million increase in service revenue for reasons previously discussed. This increase in service revenue was offset partially by a $1.7 million increase in cost of services due to higher costs to support our next generation ground network and products. While we expect our gateway support and maintenance cost to Hughes and Ericsson to recur at approximately $3 million annually, we would expect lower products R&D cost in 2018 after we launched the devices currently under development. On a year-over-year basis, adjusted EBITDA also reached its highest level since 2006 up 57% to $32 million. This growth was driven by a 19% increase in service revenue with total MG&A and cost of services up 6% after excluding non-cash EBITDA adjustments. While cost of services was up due to the same factors as the quarter-to-date period, MG&A was down due to lower subscriber acquisition cost as we reserve our spending for launch related expenses this year. The trend in high margin service revenue driving significant EBITDA growth has continued, reflecting our success in maximizing recurring service revenue generated from our subscriber base. This operational efficiency is paramount since incremental next generation cost to support our gateways and develop our products are being invested prior to the revenues from these assets. And now turning to liquidity. As of December 31, 2017, our sources of liquidity included cash flows from operation, and unrestricted cash balance of approximately $42 million and access to approximately $13 million currently held in restricted cash account, which is available to pay debt service obligations in June. I will discuss our other restricted cash account for debt service separately. Projected contractual obligations over the next 12 months consists primarily of principal and interest payments due under the facility agreement of $78 million and $24 million respectively, ignoring variability in our interest rate, these amounts are due and essentially equal instalments in June and December. We also have $1.3 million outstanding under our 8% convertible notes, which have a put date on April 1 of this year at an exercise price of $0.73 per share. Another obligation is to fund our debt service reserve account under our facility agreement. As part of our most recent amendments, our required restricted cash balance now fluctuates each June and December to equal the principal and interest amounts due on the subsequent payment date. This required balance increases from $51 million on December 31, 2017 which is currently funded to $59 million at the end of this year. Our cash capital expenditures are expected to be in line with 2017, supporting various initiatives that are underway or projected. We also remain in compliance with all of our debt agreements as of December 31, 2017. However, we do expect that we'll have to raise equity proceeds to cure covenant shortfall in December 2018. The extent of this cure will depend primarily on the amount of EBITDA generated this year. Based on these cash inflows and outflows, we expect a funding gap in December 2018. While the exact amount is contingent and discretionary and variable items including CapEx and operating cash flows, we expect that this funding gap will be between $40 million and $50 million. And now a few comments on the tax reform bill passed in December. Although significant changes were made to U.S. tax law, these changes do not currently result in a material financial statement impact for Globalstar due primarily to the full valuation allowance recorded on our deferred tax assets. One of the most significant changes was a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%. Our existing and operating losses and other deferred tax assets have been remeasured to reflect the utilization at this lower rate with an offsetting reduction in our valuation allowance and therefore no income statement impact. Another change impacting most multinational companies was a one-time transition tax. We've determined that we are not subject to this transition tax based on an analysis of all of our foreign subsidiary earnings. We've also analyzed the changes to the NOL utilization regulations, the repeal of the alternative minimum tax and provisions to both accelerate and limit certain deductions. While the impact of these changes will continue to be considered as part of our tax planning strategies, they are not expected to have a meaningful impact in the near-term due primarily to our $1.7 billion U.S. NOI carry forward as of December 31, 2017. In summary, we are pleased with another year of solid financial results, including historic EBITDA levels as we recorded the highest adjusted EBITDA in more than 10 years. We've continued to successfully grow high-margin service revenue while managing our discretionary spending. However, we recognize that is not sufficient to support our current debt service obligations and therefore we continue to aggressively pursue various spectrum-related and other business development opportunities to augment the current operating cash flows generated from our core satellite business. I will now turn the call over to the operator for Q&A, operator?

Thank you. We'll now begin the question-and-answer session. [Operator instructions] Okay. And we do have a question from Jim. Jim you can go ahead with your question.

Yeah. Thank you. It's Jim McIlree of Chardan.

Hey Jim.

Hey. Jay, you talked about applications for covering the 800 million pops and my question is are those -- did those 800 million include the U.S. or is that in addition to the U.S.?

This is in addition to the United States. So, it's a little bit over 1.1 or 1.2 billion when you put the United States into it Jim.

Okay. And besides the one grant that you have so far, are there any other -- are those 800 million -- have there been any applications before those 800 million that you referred to?

There are a series of applications that are in and others that are going in right now, but we never put an application in until we've had meetings with the regulatory authorities and been given a general greenlight to file. So, I think it's safe to say that when we file, we already have an understanding that the process is a process that we're willing to engage in, in countries that we think it's about worth the effort to do so. So, there are right now I can't say exactly how many we've actually filed versus those that we're about to file, but there are numerous filings that have already been made and some of those countries are very, very large and some of them are smaller, but they are broadly across every continent. So, I think in this next year should be very interesting for all of us as a few additional approvals arrive.

Right And so just to frame it in terms of round numbers, we've got 300 million in the U.S., 800 million to be filed and that there's some undisclosed number that's already been filed and that's -- it seems like that that's less than what the U.S. population is maybe about 1.5 billion or is that an incorrect assumption?

No that's a little bit off, inside the 800 million Jim, are some number that have already been filed. So, if you were kind of high grading things right now, you'd say, we've got two authorities and we have 800 million additional pops that we are bullish, as being good parts of the world for us to work in with regulators that are interested in working with us to get those approvals.

Right. Okay. I am just trying to get at what the way you guys are probably approaching it too is that you've got a pipeline of opportunities and so I am just trying to get a feel for where we are in that and still that answer is appreciated. Thank you.

And Jim, on the pipeline, that's definitely the way that we think of it. So outside of the 800 or in addition to the 800 expressed differently, there are a ton of countries that we're in discussion with right now and we haven't reached a conclusion that we're going to file, but I suspect that during the course of the next year not only will we get approvals in a lot of places, but the 800 million that we're describing will also go up a lot as we make additional filings in more countries. The objective is very obvious, when you have a series of countries that have approved it then it becomes easier and easier to get other countries to approve this youth. So, there's a bit of a flywheel effect and when they start to roll, we hope that they many, many of them roll in the course of the next year or so.

Right. Right. Got it and of those 800 million, are there a significant number where you would need to install a gateway first and offer satellite service or is that a completely separate business issue for you?

There are different regimes in different countries. There are definitely a couple of countries that had said we'd love to have you build a gateway here when you're going forward with additional services and in some countries, that's great for us, because maybe our service could be broadened if we built a second-generation gateway in some of the countries. It's by no means a standard and people say you can come here in our country, but you have to build a gateway, that's unusual, but there are certainly MSS authorities that we seek to shore up as well, because any country that we're going to, we want to make certain that we have the ability to sell the MSS products as well as terrestrial products with partners or others. So, they are in many cases going hand in glove.

Okay. And two more if I might, Jay in your commentary you mentioned Straight Path and how there was a bidding war. I'm just trying to understand the context of what you were saying there. Were you saying that this is an example of how things can quickly develop into bidding wars or were you trying to point out that maybe Straight Path absorbed some of the demand that you expected?

Yeah, yeah it was actually the former Jim. These things do all of a sudden surprise you and Straight Path was very surprising. But no, if you look at the size of a company like Straight Path, it doesn't have the effect of absorbing anything like the capital available for additional spectrum. That one was very interesting because it filled out terrestrial map for Verizon that was not otherwise full and so it was a logical fit and the bidding war itself was the battle of the titans. It was AT&T and Verizon, they went after it one, two to complete their map and wanted to foreclose that option and it went up very fast and was a little bit surprising, in fact a lot surprising to the entire industry that watched. We're not predicting that in Globalstar's case, but if those things do happen and it was certainly interesting to watch.

Yeah. Yeah. I agree I mean particularly given Straight Path negotiating position it was very interesting. And just one more, Rebecca you talked about our legacy plans in the Duplex area turning I am not sure how you phrased it, but I was trying to figure out so right now you've got, it sounds like you have two customer sets in Duplex, you have the new plants and then the legacy plans, can you kind of give us an idea about how many customers are on the legacy plans? How much opportunity there still is for those guys to switch to the higher-priced plans? And then I'm kind of assuming that as long as that dynamic exists, you're going to see kind of flat subscriber growth in the Duplex. So, one, how many are still in the legacy and then two is my assumption correct that that as long as we have that churn taking place then we'll probably see kind of flat subscriber growth for Duplex.

Sure. I think about it a little bit differently in terms of separating the rate plans from churn and impacting our average subscriber base because as the subscribers are activating on our network, they're activating on our current rate plans, which are higher than our current ARPU level and then our legacy subscribers are being migrated or converted over to these newer rate plans as their contract renews. So of course, that's going to happen over a period of time. Generally, our contacts are for a 12-month period. I don't have the exact number that hadn't been migrated yet, but I know that our base will be fully migrated by around September or October of 2018. So that's when you can assume that all of those handset subscribers are going to be on our current rate plans. And then of course you've got the mix of Sat-Fi2 customers who are going to be coming on entirely different rate plans, which are kind of still in the works in terms of how this will be defined. And then on the subscriber base we have seen some churn there during overall activations have been lower because our equipment sales have been lower. So not necessarily directly related to service pricing even though you could say that maybe the higher service pricing is impacting demand a little bit, but I think it's more just the volume of equipment sales driving lower activations. And so, I think until we launch Sat-Fi2 our next Duplex device, you're going to continue to see a decline compared to the prior period for average subscribers. Does that answer your question?

It does. It does. Thank you very much and that's it for me. Jay I've been skeptical that you'd be able to get EBITDA on the constellation this high, so congratulations on that. And good luck with the spectrum, guys. We'll talk back to you later.

Great. Jim, thank you as always.

Thanks everybody for joining us today. We really appreciate your time and hope we have an opportunity to talk to you again soon, should be in this case 60, 70 days from now and have a good day, thank you.

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