Globalstar, Inc. (GSAT) Q4 2018 Earnings Report, Transcript and Summary

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

Good afternoon, everyone and thank you for joining us to discuss Q4 and full year 2018 results. Following my brief prepared remarks, Dave Kagan will go into the highlights of the business and then Rebecca Clary will provide an overview of the financials. As always, Tim Taylor will join us for Q&A. 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 and the risk factors sections of Globalstar’s SEC filings and in today’s press release. 2018 was a very eventful year and despite all of the stress endured, Globalstar entered 2019 a considerably stronger and better positioned company than the one that began in 2018. And despite these distractions around the proposed merger and the subsequent litigation, we advanced the satellite business by introducing multiple new products and have much better visibility into long-term growth drivers for this business than ever before. Satellite M2M has been successful and growing for many years at Globalstar. And as we entered 2019 both the communications industry and the Globalstar as a connectivity source are approaching an inflection point, one that places greater value on the low cost, high mobility, small bit data services that we provide. The delineation between M2M and IoT are not universally agreed. The global asset management tracking remote monitoring of all sorts both insight and outside of the cellular footprint are perfectly suited to our network architecture. Dave and his team are working on a number of projects which have the potential to eclipse the total unit volumes that we have seen in all of our years in business. Costs are decreasing. Application layers are making services much more intelligent. Connectivity demands across industry are apparently insatiable. We are well positioned to play a role on a global basis with satellites that are in service now and with service offerings at lower cost than alternatives either cellular or satellite alternatives. I am excited to see what Dave delivers over the coming years. Also during 2018, our spectrum technical team achieved 3GPP standardization of our 2.4 gigahertz spectrum, which is now referred to as Band 53. This was accomplished well ahead of schedule, thanks to the hard work of John Dooley and his staff, the support of our partner, NOKIA and others throughout industry who aided Globalstar in this rapid and successful effort. 3GPP standardization is a momentous step forward and creates an immediate path for our spectrum to be integrated broadly into the ecosystem. In fact, equipment providers, NOKIA and AirSpan already have pre-standard Band 53 infrastructure today and we expect that initial user terminals will be delivered next month. In the coming weeks, we plan to install this equipment in continued tests with a perspective long-term partner and are also planning several other private LTE deployments in partnership with NOKIA this year both in the United States and elsewhere. Turning to a different subject, as part of the settlement, we added 4 new board members, Tim Taylor known to most of you, Mike Lovett, Keith Cowan and Ben Wolff. They all have long successful careers in telecom and cable and are already providing positive guidance on the direction of the company. Tim, Keith, Ben and Bill Hasler make up a newly formed strategic review committee that has hit the ground learning as the company assesses balance sheet solutions. I would like to once again thank our former directors and no firsthand that they remain ardent supporters of Globalstar. And lastly, in December, we completed a necessary equity raise through Cantor Fitzgerald. Thermo, Mudrick and Warlander all came together and backstopped the raise providing all shareholders with the opportunity to invest, a structure agreed upon in the settlement to limit dilution as much as possible. And before I turn it over to Dave and Rebecca, I would like to reiterate that while 2018 was undoubtedly trying for all of us, we entered 2019 on firm footing with a unique and very valuable set of satellite and spectrum assets and an augmented leadership team and board to help us maximize this value for all shareholders. Going forward, I intend to focus my energy on creating opportunities from the spectrum and underappreciated satellite capacity and we will limit all of my other activities, including the participation on these calls until we have material events to report. I would now like to turn the call over to Dave Kagan.

Thank you, Jay and good afternoon everyone. I would like to reiterate my gratitude for some of the achievements Jay highlighted: 3GPP, solid financial performance, the settled shareholder lawsuit and the concurrent December financing were a lot of necessary heavy lifting and the team did a great job through it all. I was pleased to see the continued support from our largest investors as they came together to construct the topnotch board and invest the necessary capital to move forward. I believe they see the same potential in our company that I see and my job is to now execute and deliver on the potential of these assets. I am very excited to report that we finished 2018 with strong operational results. We had a solid year recording a 15% increase in revenue. Net loss for the year was $6.5 million as compared to $89.1 million in 2017. Adjusted EBITDA increased by 26% as compared to 2017 and for 2018, it was the highest level ever achieved at $40.6 million. From a product launch perspective, it was also a record year with three new products: SmartOne Solar, SPOT X and Sat-Fi2. We expect momentum to continue to build in 2019 and beyond for these devices. We are also already developing specialized products based on a new Duplex product, Sat-Fi2 targeting inland and coastal waterway markets as well as affordable solutions for remote locations. SPOT X now allows our large spot subscriber base to not only send one way emergency and tracking data, but to receive messages using S-band dialing services, a major gap closer in the market. The introduction of our SmartOne Solar IoT device has rejuvenated the IoT market for Globalstar. In the first 9 months since introduction, we sold in access of 25,000 units and have a robust pipeline for this ATEX and intrinsically safe certified product. The expansion potential of this low cost of long-lasting device is very large as we begin penetrating new markets. We are also in the process of miniaturizing our IoT product line in order to address markets that require low cost and small form factors. Like Jay said, this is a rapidly evolving and growing segment of the communications market and we are evolving our product line to ensure we offer global services with an unmatched offering. When our new miniaturized IoT products are introduced into the market, we expect to take market share from cellular based providers, other satellite service providers and long-range radio solutions as well as to penetrate use cases that are currently un-served by these alternatives. Some of these use cases provide opportunities to increase sales to much higher levels than the satellite market has traditionally supported. It is my goal for the team to win a few opportunities like this in the near-term and we are always trying to see our pipeline building since we launched our newest products. We expect 2019 to be a great year for Globalstar and we are all excited about what lies ahead for the company. And now, I would like to turn it over to Rebecca for a detailed discussion of our financial performance and I look forward to answering your questions during the Q&A session. Rebecca?

Thank you, Dave and good afternoon everyone. Our satellite business again produced meaningful growth from the prior year as we generated higher ARPU in all core areas of our business and continue to expand our total subscriber base. These increases drove 9% revenue growth when compared to the fourth quarter of 2017 and a 15% increase year-over-year. Focusing on quarter-over-quarter financial performance, the increase in total revenue was due almost entirely to higher revenue from subscriber equipment sales as we introduced new products into the market during 2018. As Dave mentioned, these products were met with high demand, particularly in the commercial IoT space. Our newest IoT device is being deployed in a heavy industry application in the oil and gas market, an ideal use case for this product and provides value-rich features including intrinsically safe certifications, Bluetooth and solar power. We also have seen an increase in demand for our legacy commercial Simplex devices, which appeal to new resellers and end-users serving a variety of business cases. Our newest SPOT product also drove interest in the market as its two-way functionality with the much anticipated feature by both current and perspective customers. While we experienced some cannibalization to our mature legacy devices, our SPOT X product is to look at a higher price point driving SPOT equipment revenue to nearly double the revenue recorded in the fourth quarter of 2017. We look forward to adding new functionality to all of our recently launched products in the near future to address user feedback and optimize performance. Total service revenue also increased from the fourth quarter of 2017, but only slightly as the incremental revenue from recent pricing changes impacting Duplex and SPOT ARPU which generally offsets by lower average subscribers. Given a controlled churn level in our core markets, we look to stabilize our subscriber base through a ramp in sales of our newest products led by focused marketing efforts and enhanced functionality later in 2019. Net loss increased from the fourth quarter of 2017 due primarily to changes in derivative valuation adjustments. Our derivative values can fluctuate widely based on various inputs, but primarily are driven by changes in our stock price on the beginning and ending days of each reporting period. Unlike 2017, there was an increase in our stock price during the fourth quarter of 2018, which drove a non-cash loss as the liability increased. Adjusted EBITDA was up 11% during the fourth quarter of 2018 due to the increase in revenue offset partially by a higher cost of subscriber equipment sales in line with the increases in devices sold. Importantly, adjusted EBITDA reached its highest annual level ever for the company during 2018, up 26% to $40.6 million. This growth was driven primarily by a 13% increase in service revenue with MG&A and cost of services up 7% in total after excluding EBITDA adjustments. We expect similar increases in these operating expenses during 2019 in order to support growth in the business, including investments in certain key initiatives many of which we believe are significant opportunities to expand the use of our valuable satellite capacity and drive longer term revenue growth. And now, liquidity update, we successfully raised $60 million during equity offering in December primarily to fund principal and interest payments due at the end of the year and maintain compliance with our financial covenants. At year end, our current sources of liquidity included cash flows from operations and an unrestricted cash balance of approximately $15 million. We also held $60 million in our debt service reserve accounts which fluctuates as the balance is required to equal the subsequent period’s principal and interest payment, but generally is restricted to fund the final payment due under the facility agreement in December 2022. Projected contractual obligations during 2019 consist primarily of principal and interest payments due under the facility agreements of $95 million and $25 million respectively. Ignoring variability in our interest rate, these amounts are due in essentially equal installments in June and December. Our cash capital expenditures are expected to be in line with 2018 around $15 million supporting various initiatives that are planned or currently underway. We expect that our liquidity sources will be insufficient to fund our obligations and cure covenant shortfalls in 2019 under the existing terms of our facility agreement. Our funding gap is projected to be around $50 million in both June and December 2019. Our management team together with the members of our newly created strategic review committee is focused on addressing this shortfall in a way that makes the most sense for the company and its shareholders. In summary, we have been able to generate significant financial growth in our satellite business in recent years, leveraging our initiatives focused on maximizing high-margin recurring service revenue in order to drive higher EBITDA. We remain dedicated to expanding the value of the satellite business from other opportunities of which we are capable and well-positioned to achieve. I will now turn the call over to the operator for Q&A. Operator?

Thank you. [Operator Instructions] And our first question comes from Lance Vitanza from Cowen. Please go ahead.

Hi, guys. Thanks for taking the questions. Jay, I think the most interesting thing I heard was the potential deployments on LTE with NOKIA and then I think you have said something about a potential longer term usage partner, but could you – to the extent you could sort of dug into that and flush that out a little bit that would be driven?

Sure. We have been working with NOKIA as everyone knows for quite sometime. They were especially helpful to us in the 3GPP process, but we have also been involved with them on a global basis working on private LTE implementations. They were the first to bring us functioning Band 53 equipment and we expect to have them deliver a relatively meaningful amount of that equipment during the course of 2019. The projects that we are working with them on are some within the United States, some outside of the U.S. in areas where we either have spectrum approved terrestrially or where we are focused on obtaining terrestrial approvals, but they are a great partner, because private LTE implementation, spectrum has one piece of it. The infrastructure is another piece of it, but importantly when you really diagram an implementation like that, there is an extraordinary amount of software, core cloud and connectivity beyond the spectrum connectivity that’s necessary in order to make one of those private LTE systems function. So, it’s great to have a partner like them that have the capabilities to provide all of those services except for spectrum. And when they look at having a piece of spectrum which is uniform throughout the world, that’s what is particularly interesting to them, because you can imagine, any implementation they have will use some amount of unlicensed spectrum, some amount of licensed spectrum, but if you can build an offering that is the same wherever you are in the world and it always uses the same piece of license spectrum, it means that their interactions with local carriers can be limited to zero and that’s really a good thing. So, we are anxious to advance a few of these deployments and see how they play out. None of them at this moment are commercial and they are not ready for primetime, so we can’t really talk about them substantively now except to say that there are quite a few of them that were involved with them in.

That’s helpful. I am sure you can’t say much of anything on this, but have there been any conversations with NOKIA regarding any kind of strategic investment or solving the balance sheet problem?

Not specifically. We are involved with NOKIA in a number of these projects and to the extent that they prove up in the fashion that we hope they will, they certainly contribute to minimizing the balance sheet issues, but through revenue and profitability as opposed to through an investment. But we have a lot of hope for the work that we are doing with them. They have been very, very quick to deliver the equipment next month. They expect to deliver user equipment as well, which will be used in industrial settings, which is a big help for us, because obviously that defines the chipset and other things that people think about when they think about the final user equipment. We have additional companies that we are dealing with on chips that will result in user equipment that’s pretty broad, and, of course, are working with other companies like Airspan, Pivotal and others on more of the infrastructure necessary to implement these. So, it’s pretty – it’s gathering steam, it’s pretty exciting time.

If I can just squeeze in one last question on the liquidity side. It sounds like with the principal and the interest payments being well over $100 million versus the $100 million need right. So, what you’re saying is, your cash flow positive on a unlevered basis, I mean, before debt service. And so, I guess, I’m wondering, with the constellation of the satellites that you have, what sort of the useful life left remaining before we need to start thinking about meaningful increases in capital expenditures to support your MSS business? Thanks.

Well, the satellite constellation was completed on – in 2013 and the constellation was engineered as a 15-year lifespan. As you know, we had some satellites the first time around that didn’t go beyond their contracted lifespan, but we also have many from that first constellation that we’re still operating today. So, we have great hopes that the engineering that we’ve learned on the first one applied to the second one will mean it will last lot longer than just 15 years. That said, the nature of new satellite infrastructure is characterized by a reduced price and increased functionality. And every year that goes by before we have to begin thinking about that is another year where prices seem to get lower and functions seem to be enhanced. So, we’re watching and waiting. We have no urgent need to really deal with the question of replenishment right now, but we do watch that market very carefully. We do have meetings with vendors of course, but we’re not urgently looking at replacing anything in the constellation and anything like the next few years.

Thanks so much.

Sure. Thanks.

[Operator Instructions] And our next question comes from Simon Flannery from Morgan Stanley. Your line is open.

Hi, it’s Spencer for Simon. Thanks for taking the questions. First, I guess, can you talk about the new corporate governance structure and any benefits that are emerging from that? And if there’s anything you’re able to share on the strategic review committee and how that’s shaped or changed the company’s outlook on spectrum monetization?

So, I don’t think it’s necessarily changed anything on the outlook for spectrum monetization. The first task of the SRC is to address the capital needs of the company and to do so on a permanent or relatively permanent basis. We plan to have everything completed within the next couple of months in advance of the June principal payment to BPI. So that is the current focus. There is also a focus within the SRC with regard to monetizing additional satellite capacity, but I don’t think the SRC has any fundamental change to the spectrum strategy per se.

Spencer, I’ll make just a further elaboration that the three new members plus Tim are bringing a lot of additional energy to this Board, there’s no question about that. These are talented guys, who have been around the block a lot in their careers in telecom, cable. They’ve run major companies. And so, they do come at looking at these issues with a new set of eyes and a lot of enthusiasm. And that was evident in the Board meeting that took place earlier this week. It’s just – it’s great to have them. I have high, high hopes for the new participants including Tim. The structure which includes the SRC, I think is going to be really, really helpful for the company. So, what – what’s evolved I think everybody as a shareholder of Globalstar should be pleased with.

Great. That’s helpful. And then, I guess, lastly on the international licensing, any progress there, any details you can add for expectations this year?

Sure. Much progress but not many details for a call like this. The – we are getting closer and closer on a series of countries all around the world and we’ve undertaken an effort, which will result we believe in a more general licensing regime perhaps in Europe. So, time will tell how that all plays out, but we are moving aggressively in many, many parts of the world and I’m very, very hopeful that in 2019, there will be many more countries that are approved for terrestrial use, as well as expanding our satellite footprint in services in two parts of the world, where we haven’t historically spent much time.

Great. Thank you.

Sure, Spencer.

And our next question comes from Jack Hartnett from Quadrant. Your line is open.

Good afternoon, fellas. My question is, I want to – I know it’s been spoken about here earlier with. I want to come back to the compliance issues that – it doesn’t sound to me just from listening here that would derisk our ability to be compliant with our covenants here and that of our loan agreements. And whether that’s – in order to get into compliance, whether that’s going to call for dilution, whether that’s going to call for partnership you’re going to have to monetize some of the values of spectrum here or whether that’s going to come from the company. I don’t really – I’m not clear about it, and I don’t know how much at risk we are, because I thought initially, we were at least last quarter that we were on the path to derisking this shortfall?

Yes, Jack, this is Rebecca. Thanks for the question. So, in terms of compliance issues we can be in compliance with our financial covenants either through increasing EBITDA, which of course to come through either spectrum monetization or increased cash flows generated from our core satellite business or we have a mechanism within our facility agreement that allows for equity share contribution. And that can come from equity, which may or may not be dilutive as we did in December, we offered it our existing investors at their pro rata ownership to avoid that issue, but we can also do it by issuing debt, which, of course, would avoid the dilution situation. So, many avenues available to us. This has been a situation we’ve been in for several years and we have been able to maintain compliance thus far, and I expect that we will be able to continue.

So, you think it’s going to be organic then?

No, not necessarily to come from an equity share contribution, which would be external financing.

Right, right. Okay. Because it seems like we’ve been here before and it’s just – we’re not de-risked as far as I can see?

No. Go ahead, Tim.

So, Jack I think that going forward, I would not expect the same type of structures that we’ve done in the past to solve either the capital needs on a 12-month basis or a 6-month basis for immediate principal and interest obligation. I think that – it is most likely to do something on a more permanent basis, it’s not a fully permanent basis, where there would be more of a restructuring than an equity cure in a short-term, I think that combined with an amendment with the French banks, I think that we can do something that as Rebecca said is very sensitive to dilution. So, I do think that it’s going to be fundamentally different going forward than what you’ve seen over the past couple of years.

Okay.

And this is what the SRC is focused on. This is the first topic at hand for the SRC. They are completely focused.

Okay. Last question along that line too. If you monetize your spectrum assets, how close are we to actually realizing upon something like that to help us you with both value of the company and the perception of the value of the company in the market because this stock price is just not – is not helping. That’s – but I suspect it – it’s not going to take much to light a match into that market if in fact you can speak to it or that you can realize some of the value here that this isn’t – is inherent in the company?

Yes. It’s a fundamental question at hand, of course. And if you look at the history of spectrum monetization, I think it’s best described as episodic and it’s incumbent on us to ensure that we have the right capital structure in place to limit dilution as much as possible, so that when the episode comes and if spectrum monetization event matures, we all materially benefit from it. So, we’re going to right the ship, pick the capital structure and be positioned for that day.

Well, last quarter we had about I think was 12 NDAs signed. What’s going on with those? I sit here and just say they have been signed, but the results of, I’m not clear about?

So, I think you’re likely referring to NDAs that were signed during the process that was run in 2017, that did not result in a transaction at that time, but, hopefully, we’ll be set up well to effect such a transaction in the not-too-distant future. I don’t expect it tomorrow, but hopefully it won’t be 2 years, 3 years, 5 years down the line, but we’re going to have a capital structure in place, so that we can realize the upside for that when that day does come.

Are we talking about months here?

I would not expect a material spectrum monetization within a couple of months. I think that that’s unrealistic.

No, I understand that, but at least if any – as long as it’s not years, it’s the – unless you have other concern here?

Well, I think we’re well positioned for when it does happen. I think the fundamentals of the industry are only moving further and further in our direction. I think the world continues to move to small cells and we have the world’s only dedicated small cell spectrum to NPF [ph], a major player as networks continue to identify.

Okay, thank you.

[Operator Instructions] And our next question comes from Steven Arziban [ph] from Madeline Capital. Your line is open.

Hi, thank you for taking the call, and congrats on 3GPP approval. I just – I have three questions in particular. Last quarter the company got approval internationally in a number of jurisdictions and I don’t believe those have been disclosed. Is the company prepared to go to disclose those jurisdictions today?

We are not disclosing those jurisdictions today.

Okay. Any sense as to when the company will be able to go to disclose that?

I think that and Steven, you’re obviously involved during the FCC process when a number of outside parties became active participants, I think some were not productive, active participants to say the least. So, I think it’s best for the company long-term to really focus not have outsiders play a role, get the authorizations. The large and valuable ones hopefully as soon as possible and we’ve had some relatively small wins so far, but we expect big wins here this year, and I think that we’ll just continue to assess when we think it’s right for the company to disclose the IDs of those wins.

Okay. But the larger ones will be disclosed, I guess, I would think those are material, no?

Yes, absolutely. So, to the extent there is any material authorization in hand, we will absolutely disclose and have an obligation to do so.

Okay, fair enough. With regards to the capital structure needs of the company, does the company need to wait for the April 1, I think it’s the April 1, court date to approve the settlements in that regard, I mean, is that a meaningful date as far this process goes on investing the capital structure or can you do something subject to that date?

It is not subject to that date in any form.

Okay. Then my last question revolves around the company’s C-band holdings. Obviously, the company has pretty substantial amount of C-band capacity as the company has a plan or looking to go ahead and put together a plan to perhaps reallocate some of that spectrum for terrestrial use?

Steven, obviously we are watching very carefully and part of our spectrum is within the mid-band NOI, it’s not the subject of the 3.7 to 4.2 slice which is being decided right now or over some period of time including right now for Intelsat FTS and others, but that does create a nice model for how we might go forward and how the SEC might go forward. So we are watching that. We have got a lot of other things that we are busy doing. We have talked about most of those today. And so we are watching the C-band process. We will participate in the mid-band NOI continuously while these things go forward, but we don’t – we haven’t really been aggressive in C-band at this moment.

Does it make sense to put together a process to piggyback off of that effort that’s in place or do you want to let them sort of spearhead the effort and then hopefully use that as precedent to get something similar done in the company’s holdings?

Sure. Well, certainly we are doing more of the latter than the former. And we are watching them. We know those people well and we do have conversations with them frequently and there is some possibilities for us to go forward within a format that includes our spectrum within theirs, but for the most part, I think it is productive to let that thing play out a little bit and make sure it goes through in the fashion that it is that people expect that it will. And if it does and then of course it’s much, much easier for us to go back to the SEC and say let’s just follow that same roadmap. But sometimes these things get a little bit bumpy and it probably be just trying with us that that was bumpy on somebody else’s nickel. We watch from the sidelines try to be helpful if we are asked, but not find ourselves right in the middle of it.

Very true. And that is you have the 3GPP behind you, process-wise, I mean I think most of us have been here for the value for the company’s S-band. I mean, how do you see the company’s S-band value proposition change over the last 2 years since we got SEC approval?

Well, certainly it’s not reflected in the stock price. I mean, that’s clear. But importantly, we were asked by various parties to the NDAs that were discussed a little bit ago to go through the 3GPP process to make our spectrum more useful in those discussions and we did that. We have completed it here just a couple of months ago and we are extremely happy with how that went down and the parties that we were in conversations with and remain in conversations with are very pleased that the 3GPP went as smoothly as it did. There is a lot more work for us to do with anybody who wants to transact around the spectrum, but we are doing that work. And we are again as we mature up other pieces of spectrum in other parts of the world, it broadens the possibility that some players are more interested in what it is that we have and how we do it, but we are completely sanguine that going through the 3GPP process was exactly right for the company and the parties that we are in conversations with obviously thought so. So we are pleased with it.

Thank you. I understand that the company’s needs to adjust the capital structure are paramount at the moment and it makes a lot of sense to focus on that today, but once you get passed that, are there other sort of hurdles or requests or requirements that have been asked by counterparties in regards to I guess usability of the S-band that they will launch from the company to do it before going ahead and I guess entertaining bids or offers?

So, Steven, this is a very known band. Its most widely used band throughout the U.S. and in most countries. So the physical characteristics of the spectrum are very well known to potential parties, the way that it operates within a phone, within a chipset and it’s interoperable with existing peripheral components. That is very well known. So 3GPP process was obviously an important milestone, only final step that needs to take place is equipment certification, which is not a very difficult one, but it is very important one. So that is really the only requirement standing in the way of commercial deployments.

So is that from the handset makers like Apple and Samsung, for example, them certifying the chipsets insider their devices?

Yes, exactly.

Okay, thank you so much. That was very helpful.

Thank you everyone. 2018 was a very significant and successful year for the company. We anticipate 2019 to be a successful one as well. We are very excited about what lies ahead for the company. Thank you very much for your participation this afternoon.

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