Globalstar, Inc. (GSAT) Q1 2018 Earnings Report, Transcript and Summary

Welcome to the Q1 2018 Globalstar, Inc. Earnings Conference Call. My name is John, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note the conference is being recorded. And I’ll now turn the call over to Jay Monroe, CEO.

Good morning, and thank you all for joining us for the Q1 2018 earnings call. One quick thing before we start, I’d like to congratulate Rebecca Clary on the recent birth of her child and look forward to her return. Since she is on maternity leave now, Tim Taylor will join me on the call to discuss current quarter financials. Also, until we file our merger-related S-4, we’ll have to limit our Q&A to the satellite business. Tim and I will participate in answering any questions on that subject after the prepared remarks. Our press release includes reconciliations to U.S. GAAP of any non-GAAP financial measures that we mention today. Please note that today’s earnings call contains forward-looking statements intended to fall within the safe harbor provided under the security 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. 2018 has already been a busy year for the Globalstar team. Adjusted EBITDA growth has continued to be strong, up close to 40% as compared to the same quarter in 2017. This was accomplished prior to any contribution from new products and from new services. Last month, we released our new SmartOne Solar product, which is used for remote asset tracking where changing batteries is either impossible or not economical. I’m very pleased with the markets’ initial reception. We have partnered with a major wireless carrier and GLOBECOM on this product, and we are currently delivering 10,000 units, with the potential to deliver many thousands more for one of the world’s largest oil and gas firms. This deal shows how useful our MSS products and services are for a variety of the evolving IoT applications. We have also released the long-awaited Sat-Fi2 product, which allows subscribers to access our satellite system using their existing WiFi-enabled devices. The initial shipments have now been completed after beta testing concluded one month ago, and the product has been anxiously anticipated by our distribution network. This is a welcomed addition to our product line and the first to utilize the second-generation network. Next on the product rollout is SPOT X, which is actually being released today. SPOT X transforms the legacy transmit-only SPOT service into a full two-way messaging device. SPOT X provides traditional tracking and emergency SOS capabilities like all of our SPOT products, but it also allows subscribers to communicate with anyone for work or personal purposes in a fully integrated texting device. Lastly, Globalstar Automotive team has been busy working with Tier 1 suppliers to the major global car companies to provide services for future connected and autonomous car markets. This has the potential to be a very large revenue and profit contributor for a company of our size, and our satellite system has specific capabilities well aligned with the connectivity demands of the next-generation vehicles being manufactured. Ultimately, these new products and services should help drive subscribers to the Globalstar network leading to revenue growth at high incremental cash flow margins, and we’re pushing hard each day to continue the financial momentum we have developed in our satellite business. Briefly on the merger. On April 25, we announced a transformative merger with Thermo Acquisitions, Inc., including metro fiber company FiberLight, 15.5 million shares of CenturyLink’s stock, $100 million of cash and $25 million of other assets, which include Globalstar’s future headquarters and minority stakes in Pivotal Commware and Orion Labs. The total value for Thermo Acquisitions, which was approved by the special committee of independent directors, is $1.645 billion, subject to certain closing adjustments. While we are limited in the details we can share prior to certain public filings, we’ve begun the processes required to close this transaction. We will file our preliminary registration statement with the SEC as soon as possible. Now I’ll turn the call over to Tim to discuss the quarter’s financial results.

Thank you, Jay, and good morning, everyone. The first quarter of 2018 saw continued momentum in our core MSS business, with revenue up 17% when compared to the first quarter of 2017. Total service revenue increased $4.5 million or 21%, resulting from growth in all of our primary revenue streams. Duplex service revenue, which was up 16%, was driven primarily by an $8 increase in our ARPU offset in part by a 6% decrease in average subscribers. Despite lower churn in Q1 2018 when compared to the prior year quarter, gross activations declined due to fewer legacy Duplex devices available in inventory for sale. Throughout the first quarter and prior to the launch of Sat-Fi2 in April, the company was focused on selling equipment at higher service plan offerings. Our continued focus on driving long-term service revenue has clearly had a positive impact on our operating results as measured by the increase in the company’s adjusted EBITDA, which I’ll cover in a minute. SPOT service revenue increased 25% during the first quarter of 2018, due primarily to an 18% increase in ARPU. The ARPU increase reflects higher average pricing plans across our subscriber base as we implemented new bundled offerings, providing 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 also renewing on these higher rates. Also driving the increase in SPOT service revenue was a 5% increase in average subscribers as our activations over the past 12 months have remained strong. The increase in service revenue was offset partially by a decrease in revenue generated from subscriber equipment sales. This was primarily driven by the decline in the volume of Duplex sales during the first quarter. We reported net income of $87.9 million versus a net loss of $20.2 million in the prior year quarter. This fluctuation was due primarily to an increase in a noncash derivative gain resulting from the decrease in the value of our derivative liabilities. The gain recorded during the first quarter of 2018 resulted from variations in several valuation inputs, including the company’s stock price as well as the shorter remaining estimated term of instruments underlying the derivative accounting. Adjusted EBITDA increased 39% to $7.5 million in the first quarter of 2018. This growth was due primarily to a $4 million increase in revenue, offset partially by a $1.9 million increase in total operating expenses, excluding EBITDA adjustments. The 21% increase in high margin service revenue continues to be the largest driver of our EBITDA growth. As of March 31, our sources of liquidity include future cash flow from operations and unrestricted cash balance of approximately $49 million, access to approximately $13 million currently held in a restricted account available to pay debt service obligations in June and $51 million held in the debt service reserve account. Isolating Globalstar on a stand-alone basis, contractual obligations over the next 12 months consist primarily of principal and interest payments due under the facility agreement of $78 million and $24 million, respectively. Assuming a constant interest rate, these amounts are due and essentially equal installments in June and December 2018. Additionally, as part of the 2017 facility amendment, the DSRA required balance fluctuates to equal to principal and interest amounts due on the subsequent payment date. This required balance for the current terms in amortization schedule is expected to increase from approximately $51 million to $59 million in December 2018. Cash capital expenditures are expected to be in line with recent historical periods, supporting various initiatives that are underway. We remain in compliance with all of our debt covenants as of March 31, 2018. As announced on April 25, Globalstar signed a merger agreement with Thermo Acquisitions pursuant to which the following assets will be combined. FiberLight, a Georgia-based metro fiber provider, 15.5 million of CenturyLink stock valued at approximately $280 million and currently generating $34 million of annual dividends, $100 million of cash and $25 million in other assets. This merger is expected to create a fundamentally stronger company with significantly reduced leverage and diversified holdings serving the global telecommunications industry. The liquidity sources of the combined entity will comprise of the following: one, the satellite operations; two, leasing and other monetization revenue from spectrum, both domestically and internationally; three, FiberLight; four, the dividend income; and five, additional income from Thermo Investments. The company will house satellite, spectrum and fiber assets, serving the telecommunications industry at a time of rapid change across these sectors. Looking forward to the full year 2019, pro forma for the merger, management expects adjusted EBITDA of the combined entity to be in excess of $165 million and combined net debt at December 31, 2019, of less than $200 million. Upon completion of the merger, the company expects to initiate a rights offering of up to $100 million for minority shareholders on terms to be agreed. This offering is expected to be available to holders of record on the date of closing and will include an oversubscription privilege allowing for the subscription of additional shares with allotments otherwise on a pro rata basis. In connection with and on account of the pending merger, Globalstar has reached an agreement in principle with our French lenders on certain terms of the BPIFAE facility agreement. The agreement provides for annual deferrals of up to $30 million in principal repayments and a fixed margin of 3.25% over six-month LIBOR subject to certain liquidity tests over time. Additionally, the parties have agreed to reset financial covenants and amend certain other material items. This is subject in all respects to lender and BPIFAE committee approvals and final due diligence. We will now open up the line for Q&A, where we look forward to answering questions on the quarterly results.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question is from Jim McIlree from Chardan Capital.

Yes, thanks a lot and good morning. The satellite operations have obviously improved tremendously over the past few quarters. Just wondering, if there is a lot more to go or if you think you’re kind of at the level where you’re, I don’t want to say done, but closer to being done in terms of improving margins or growing the top line?

Jim, let me make a couple of points on that. First, no, we’re nowhere near done in that business. And we are just releasing those products that I described a moment ago. And one of them, the Solar product has sold 10,000 units right out-of-the-box to the company that I was describing. We also have Sat-Fi2 and SPOT X that are just about to hit the marketplace. Those will extend the marketplaces for our customers to different products with different utilizations, and I think it’s just tremendous opportunities there. Importantly though, there are whole new segments, that we’re attacking now including the connected car, which I briefly mentioned. There are many different aspects of the connected car, and people think about it primarily from the perspective of autonomous driving, which, of course, is a super high bandwidth application. But how that occurs and the other elements coming off of a car that allow you to navigate are actually a series of opportunities for Globalstar. So there are number of things that we’re going to pursue, several that are not even on the near-term horizon, but everything that I just mentioned is. So we anticipate a growing business over the next several years. No question about it.

Okay, great. That’s very helpful. And then on the merger, do you need FCC authorization for this or are there license transfers of any sort that you need to get to navigate through the [indiscernible]?

Jim, all of that will be carefully spelled out in the S-4 and I think we have to wait until that goes out in the marketplace. It will be a major document with an enormous amount of detail. So we encourage you to hold that question until after that comes out, and then we’ll be happy to elaborate.

Okay, great. Then we’ll reconnect at that time. And then lastly, on Duplex subscribers, Duplex sales. Tim, you mentioned that Duplex hardware sales were either down or lower than you had expected, I’m not sure which you used. But can you just give a little bit further clarity on what’s happening with the Duplex business inventory of old equipment, et cetera?

Sure. That is mainly driven by the number of total Duplex phones that we have in inventory. We’ve been closely controlling that number over the past two years or so. And we’ve been waiting for the release of Sat-Fi2, which is our new Duplex product. So in the meantime, when you are dealing with limited inventory, the best decision for us long term is to maximize the service revenue with that limited inventory. So we’ve been selling at plans that are far and excess of what we had previously, three and four years ago. So the baseline plan for Duplex phones is now $100. And so when we materially increase the price in the short term, we have experienced a decline in the total number of new equipment sales as you would expect. However, those subscribers offer increased long-term value. And I think we’ve managed that inventory very well. But I don’t expect that to continue. Now with Sat-Fi2 in the market, I think that the Duplex growth will ramp back up.

Okay. Great. And the inventory of the old Duplex phones, is that almost completed or you still have substantial amounts left?

It’s almost completed, but it’s actually rising, because we continue to buy back phones and sell refurbished phones for those subscribers that may have demands for Duplex in a way that Sat-Fi2 does not meet their demands. So it’s slightly rising month after month, but that is not a sustainable trend. We may get a few thousand, but it’s not a material amount overtime and we’re going to be making a full transition with Sat-Fi2.

Okay. And as you make that transition to Sat-Fi2, would the overall churn rates increase? Is that a reasonable expectation?

We’ll see. I’ mean, we don’t have guidance on churn. I think that for the most part, we’re selling to the same type of subscriber with a higher quality piece of equipment and higher quality service on new second-gen – on a new second-gen network. So I don’t expect to the extent there is any increase in churn. I don’t think that it’s going to be material. We think that it would be in line with historical averages and hopefully less than that.

Okay, great. Well, that’s it for me. Thanks for everything. Congrats on the deal and the results. I think I’ve said it before how I’ve been surprised how well are you needed to improve the constellations, operations. And we’ll speaking in soon. Thank you.

Thank you, Jim.

Our next question is from Jonathan Chaplin from New Street Research.

Hey guys, it’s Vivek on for Jonathan. Just a quick one here. It seems like you’re positioning Thermo as an investment company. I think a lot of folks on the calls have understand that GSAT business pretty well and have thoughts about its value. But maybe you could just talk about your track record as an investor maybe in another fields that folks are less familiar with? And then maybe comment about what the sort of opportunity set looks like going forward?

Okay. I think I can do that without straying into too much on the merger itself. Look, Thermo has been around since the mid-80s. And we kind of operate under four general concepts. We want to manage assets and companies ourselves. We want to invest in hard assets. We have permanent capital. And we want to invest in industries that are undergoing paradigm shift or regulatory changes or other macro trend that provides a long-term opportunity for us to invest and manage. So when you go all the way back to the beginning, the start of Thermo in the mid-80s took advantage of a big regulatory change that was happening in the energy markets. This was the Energy Act from the days of Jimmy Carter, which among other things provided for people to sell electricity back to utilities under certain circumstances. And so there was a macro trend of energy deregulation, which affected the power industry, natural gas industry, oil industry and several other things, but a true macro long-term cycle. We had another cycle that we have ridden for a long time, and that was real estate in the urban core. The whole move of people in the United States back into cities and revitalization of urban cores is something that we saw coming. And we did a significant amount of that in a couple of major metropolitan areas. I think the third biggest trend on that we have ridden, and is probably the subject of the future for Thermo for the next several years, is increasing data and telecom deregulation, and just to move to 5G. So those are the three macro trends that we, as a company, have been able to invest in, whether it’s energy assets or real estate in urban areas or the things that we think of as Globalstar and FiberLight and other things in the telecom spirits always inclusive of hard asset. So cogeneration started in 1984. Natural gas started for us in the late ’80s, 1989. We started investing aggressively in real estate in ’95. The fiber business, we got into in 2002. The satellite business in 2004. And aggressively in the spectrum business and probably in, however you want to start that clock 2010, ’12, ’13, through Globalstar. And each of these provided us a platform that we could move into multiple aspects. We’ve built a series of power plants, a series of gas fields to fuel those power plants and increase the margins in that business, a series of real estate investments. And ultimately, a series of telecom-based investments. And we would expect that, that telecom focus would continue as part of our going forward strategy. But without a doubt, we are a long-term permanent capital investors. And that’s really proved profitable for us. We had a very, very modest beginning with a few thousand dollars, and we parlayed it through a lot of work and deeply involved day-to-day management for all of these primary assets into substantial returns over the years. So that’s the background, that’s the experience, and I think that’s what we bring to the future of this public arrangement.

Got it. Thanks, Jay.

You’re welcome.

[Operator Instructions] Our next question is from Simon Flannery from Morgan Stanley.

It’s Spencer for Simon. Thanks for taking the question. There has been a lot of recent excitement around the C-band. I think you guys have 60 megahertz on shared spectrum in the 5 gigahertz range and then maybe another sort of 60, above 60. So how are you thinking about the C-band assets and the monetization opportunity there?

Spencer, obviously, this is a spectrum band that we have talked about from time to time. The way that the notice of information is formatted at the SEC right now, includes our band. But we are watching that NOI process carefully or observing what’s taking place with other parties to it. And we have not been exceedingly active in it up till now. It, of course, is an opportunity for us, though a very, very long-dated opportunity and something that we hope is in our future, but it’s not in our present.

Okay. And then on the international front, are you expecting any more approvals this year?

Well, we’re continuing to work in all of those jurisdictions. And as we have said in the past, we have a team of people working in different regions of the world, different teams for different regions. And those conversations go on daily. Those of you who know the company, know that Barbee is on the road constantly, trying to mature those up. Hopefully, that – they’re serious of them, they don’t take quite as long as it took us in the FCC to get to finality. And – but – and I believe that many of them won’t. The critical question, of course, is when you have such an authority, how do you utilize it? All of which again, is very, very long dated and just takes a while. The upside exists from the operations in these places around the world without a doubt. But it’s, again, it’s that same broad trend that I was talking about a moment ago. And telecom is certainly not restricted to the shores of the United States, I mean, the growth is everywhere. But how fast it occurs, how meaningful it is in the short term to profitability remains to be the seen, but we’re certainly working on it every day.

Okay, great. Thank you.

I’ll turn the call back over to Jay for our closing remarks.

Great. Listen, I appreciate everybody joining the call this morning. And we will file an S-4 and look forward to having another call after that goes out so that we can explain it in a ton of detail, but I think, it probably answers a million questions that people have, some of which they may not even know that they have yet. So we’ll prompt others and we look forward to going through that in a lot of detail. And we’ll get it filed as promptly as we possibly can. Now thank you all for joining today. Appreciate it.

Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for participating, and you may now disconnect.