Globalstar, Inc. (GSAT) Q1 2019 Earnings Report, Transcript and Summary

Welcome to Globalstar Inc First Quarter 2019 Earnings Conference Call. My name is Sofia 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 Dave Kagan, CEO. Mr. Kagan, you may begin.

Thank you, operator. Good afternoon, everyone and thank you for joining us to discuss our Q1, 2019 results. Following my prepared remarks, Rebecca Clary will provide an overview of the financials. As always, Jay Monroe and 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 section of Globalstar’s SEC filings and in today’s press release. Since this is my first time leading Globalstar's earnings call, I want to use this opportunity to take a step back and explain where I see the company is headed in the medium and long term, while quick focus on each day, how we prioritize our work flow and how we plan to build and drive shareholder value. Since altering the make up of the board and the formation of the strategic review committee, we've undertaken a full review of our assets, the business and range of opportunities ahead of us. Beyond our core historic business sectors which I'll discuss below in detail, we're focused on three areas. First, an expanded focus on IoT in its many forms which we believe will be an increasingly important part of our business going forward. We are working on a number of large projects which are committed MOUs or letter of intent and could substantially improve the growth trajectory. One such project under MOU could double our total subscriber base in a single year, and a total potential is for than 2 million units. And this is limited to a single commentary. We believe we can replicate this product in addition of geographies and have the opportunity to completely transform our tracking and monitoring business. There are several other projects of substantial scale we are pursuing which can utilize our satellite services to deliver on customers geographically dispersed small bit data needs. These opportunities have long closing cycles but it is encouraging to find so many where our existing assets can satisfy the requirements. There has been a fundamental shift and we are now seeing projects that are few years ago would have been considered pipe dreams but are turning into reality. Our relatively simple, highly reliable and low cost network meets the demand of a large percentage of remote IoT data projects. And we are determined to do much more than just obtain some sort of basic fare share in IoT. We come to work every day, hungry to execute on this massive opportunity and we will deliver. Secondly and conceptually related, we are working with several parties who are interested in wholesale satellite capacity for their own IoT and other offerings. IoT is evolving in a way that in addition to wireless is serving as a backbone facilitator for our customers. A new structure for us which is highly accretive to EBITDA. We will focus on these opportunities while we have excess capacity, offering wholesale capacity will allow others with larger organizations to penetrate markets with satellite connectivity that will drive cash flow for us on an accelerated timeline. Thirdly, we are moving forward with a number of parties to initially and on a non-exclusive basis deploy our spectrum in private LTE. Some of these relationships are already contracted forward; others are a MoU or letter of intent phases. Under these arrangements, we will provide a licensed and secure spectrum asset to partners who have the large sales teams required to sell and implement private LTE solutions. We have a revenue sharing agreement with one such partner for certain deployments and others are being negotiated. Nokia and Airspan are both providing infrastructure and end-user devices and of course we are working closely with Qualcomm and others in support of the broader chip and device ecosystem. Under MOU, our companies focus on a variety of markets including private LTE for enterprise, agriculture, commercial property and building private networks, government, DoD, NGOs, mining and transportation, all of which require secure and licensed spectrum. We also continue testing with a prospective partner who would lease our spectrum over a significant geography in the US. Licensed, mid band spectrum is critical for the applications being tested and Band 53 is well-positioned here. We also will continue to work with cable, carriers and tech companies for nation wide spectrum leasing, but as that develops, we're proceeding with partnerships and the ecosystem to monetize the spectrum in other ways globally. We have also continued making progress in our international spectrum approval efforts. This quarter we received one more international approval and have advanced proceedings moving through regulatory bodies on most continents. By the end of the year, we are looking to have terrestrial authority or NPRM like progress in countries with a total population of between 90 million and 300 million, a wide range certainly but so goes the nature of giving regulatory guidance. My vision for the company's ultimate relationship structures for our customers and partners across both satellite and terrestrial spectrum are actually quite similar and are converging. In both cases, we have massive assets with significant capacity. We are pursuing opportunities that include both large one-off transactions and smaller partnerships which will combine to utilize as much of our capacity as possible in the sky and on the ground. These three rapidly expanding segments, plus the legacy business provide robust opportunities for years to come and it's a pleasure to see the promise and potential of Globalstar evolve into reality. Now let's shift focus to the main lines of our core satellite business. It's helpful for me to frame the business along how we internally track performance and structure our organization. First, our retail life-saving and personal tracking devices SPOT represents 38% of our subscribers. Second, out Duplex satellite voice and data products including out 1600, 1700 fix sat phones and our Sat-Fi products represent 11% though over 30% of our revenue. Third, our commercial IoT products including our SmartOne line of commercial trackers and little bit data products representing 51% of our subscriber base. It's important to note that the IoT business has developed out of our legacy product lines, which have been providing little bit data services for years. Recently, the market has embraced this a little bit rate tracking technology and our success in this market has materially accelerated. Our latest IoT products SmartOne Solar has been well received and we have sold in excess of 30,000 units since its launch just one year ago. Overall, our sales of the entire SmartOne product line continue to drive significant revenue growth with subscribers up 16% year-over-year in the first quarter of 2019. Our pipeline of large opportunities requiring IoT solutions is our largest growth area for the core business. To further capitalize on a meaningful traction we're experiencing in our IoT efforts, we've committed to additional spending on research and development for new and enhanced products both internally and with partners and are hiring the appropriate management and sales talent to further penetrate these markets. Given the success we've enjoyed over the years focused on one-way devices, we're currently developing a two-way commercial IoT reference design to provide existing and new value-added resellers with a way to manufacture a range of two-way products, utilizing our satellite network. We're also in the process of miniaturizing the core technology to provide a foundation for many smaller and more cost-effective products which we expect to drive significant subscriber and service revenue growth. We continue to drive overall revenue growth in the first quarter of 2019 which increased by 5% from the first quarter of 2018. The IoT line of business revenue grew by 48% year-over-year; SPOT revenue grew 2% and Duplex decreased by 3% as we expected due to the delayed full rollout of our Sat-Fi2 satellite hotspot. As we do most years during the second quarter, we are running significant promotions in the consumer SPOT side of the business in advance of the peak summer season, which is expected to drive additional subscriber growth in the second and third quarters and beyond. On the Duplex side, we are rolling out firmware enhancements to our Sat-Fi2 voice and data product and will be in the market by the end of this year with two derivative versions which are in test now for the maritime and remote user markets. Importantly, we are actively engaged in the process to refinance our balance sheet and have hired PJT partners to lead this effort. In concert, with this we are working with our senior secured lenders on an amended facility agreement and are focused on concluding the full process by the end of June. The improvement of our capital structure and the opportunities before us with spectrum and satellite are very much interrelated. Without structuring our balance sheet properly, the opportunities before us would be irrelevant. And without these opportunities in turn the ability to refinance is compromised. Plus we have laser focused on concluding this process in a manner that is most optimal for our shareholder base. while appropriately balancing the needs of senior lenders. We will be working very hard to close a transaction over the coming weeks. 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 a Q&A session. Rebecca?

Thank you, Dave and good morning, everyone. We have reported another quarter of meaningful growth in our core satellite business as we generated higher equipment sales and expanded our total subscriber base to 760,000. These improvements together with higher ARPU across all major product lines drove a 5% increase in total revenue when compared to the first quarter of 2018. Focusing on recurring service revenue which represented 87% of our total revenue, Simplex or commercial IOT increased 20% from the first quarter of 2019 as we expanded our market share by growing subscribers 16%. Both new and legacy device sales remain strong and churn with lower on an LTM basis. This increase was offset partially by a $450,000 decrease in engineering services revenue. The timing of which can be sporadic as it is often driven by governmental funding. While Duplex and SPOT were not major contributors to our financial growth this quarter, we have initiatives underway to increase the revenue generated from the sales of these devices and services in coming quarters. We have managed turned successfully during the last several years as we adjusted our pricing plans, even decreasing average monthly churn over this period. While our pricing adjustments have significantly improved our profitability, going forward the focus will be on the rollout of new products and services currently in the pipeline. SPOT has historically been a price leader in its segment while not sacrificing on quality. Acknowledging this, we also love to further penetrate the market with aggressive pricing promotions to ramp growth activations. We are performing robust market research to solidify and improve our understanding of what current and prospective customers want from new products and services as we enter new markets and further expand into existing verticals and geographies. Based on this analysis and the level of success from our summer promotions, we will reevaluate our long-term pricing strategy. For now we expect our future growth to be much more driven by volume rather than rate. Switching to equipment sales. We are seeing a trend with subscriber equipment revenue being the primary driver of the increase in total revenue when compared to the prior year. This is a good predictor of future activations and growth and service revenue. In the first quarter, this dynamic was driven particularly by consumer and commercial IOT equipment revenue which was up in total over 60% from the prior year. While a certain level of channel fill is expected to coincide with new products releases as we saw last year. Sales of our latest IoT devices remained elevated into 2019 as demand for these products continues. Also contributing to the $1.2 million increase in commercial IoT equipment revenue with our completion of the development of a back-office platform during the first quarter of 2019 allowing our sales team to sell direct to end-users, adding another path to market in addition to our expansive network of value-added resellers. We have also expanded our robust network of distribution partners for our SPOT family of products through the recent addition of several big-box retailers including Amazon and Dick's Sporting Goods. We expect these relationships coupled with upcoming promotions to accelerate sales of our SPOT devices as we head into our strongest selling season. We reported lower net income this quarter due primarily to a decrease in non-cash derivative gains. The lower gain reflects the movement and various underlying inputs and assumptions used to calculate our derivative values including a greater reduction in the company's stock price during the prior year's quarter. Certain non-cash items also contributed to the decrease in net income including higher depreciation and lower capitalized interest due to our second generation ground infrastructure being placed into service in April 2018. Adjusted EBITDA decreased 4% during the first quarter of 2019 due in part to an elevated level of discretionary spending as we invested in future growth through product development efforts as Dave covered in detail. This increase in operating expenses offset the $1.3 million increase in total revenue. And now turning to liquidity. We continue to retain $60 million in our debt service reserve account which is restricted to making longer-term principal and interest payments under the BPI facility agreement. Our current sources of cash include primarily an unrestricted cash balance of $40 million and operating cash flow is generated from the business. We expect that these liquidity sources will be insufficient to fund our debt service obligations over the next 12 months. Focusing on our June capital needs, our obligations include primarily principal and interest payments of $60 million. Under the current terms of the facility, we also expect to raise capital via the cure mechanism in this agreement in order to maintain compliance with our financial covenants. The exact amount of this cure will depend principally on how much EBITDA is generated by the business in the second quarter. We also expect to spend a relatively small amount on CapEx to support various business initiatives, but generally the spend is discretionary and the timing is variable. We are currently exploring various financing alternatives to address our funding requirements. We have engaged a financial advisor to guide us through this process, and are working collectively to ensure that any capital raised is in a form that avoids unnecessary dilution from an equity value perspective, and provide a long-term solution. In parallel, we are in discussions with our senior lenders regarding a possible amendment to the existing terms of our facility agreement, and appreciate their diligent work. This financing process has the full support of the Globalstar management team and recently formed strategic review committee. We look forward to updating all of our investors on our progress when appropriate. In conclusion, we are excited about the growth potential from the important initiatives that are underway. We are well-positioned to compete on many fronts and believe we will continue to grow our business as we execute on the opportunities available to us. We also look forward to continuing to focus on addressing our liquidity requirements over the next few weeks and are confident in our ability to execute our financing. With that I will turn the call over to the operator for Q&A.

[Operator Instructions] And our first question comes from Jason Bernstein from Cantor.

Hi, guys. Thanks for taking the question. So at the end of March Verizon sent in, I guess a request to open an upper C- band rulemaking and you have a lot of spectrum in the upper C band. Any comments around the potential for that and I have a follow-up question as well.

So that's something that we're actively participating in. We provided comments in the proceeding regarding 6.9. So I would recommend that you take a look at those comments. We're going to stay very active in that proceeding and there are obviously two C bands that that have the potential for terrestrial Authority in both 5.1 and 6.9. Those are very important to us. And I think the opportunities on that front are pretty significant. Exactly how it plays out and the timeline that it plays out in, not certain at this point but we're going to be incredibly active.

And would you be taking any approach like the CBA and partnering with others to explore it? Or is it something that you're doing your own at this point?

I think it's clear that we've learned a number of lessons as it comes to, as related to the SEC like processes and going it alone is not a good strategy, building a coalition is a very good one. And that's what we intend to do.

And one more, if I could. Follow up on Dave's comments about potentially licensing the spectrum in the US and the people you're talking to here. Can you clarify whether there's been a lot in the press lately about sort of private LTE networks? Is that and I think we've talked about it in the past but is that an opportunity that's applicable to the 2.4 spectrum?

Hey, Jason. This is Jay. That's exactly where we're going. Private LTE is something that has driven our strategy with Nokia and Airspan in a lot of places around the world and it is also extremely important in the United States. Dave listed a few different market segments that are substantial and in need of private LTE. People have realized what we realized a long, long, long time ago and used to talk about which was that Wi-Fi is terribly compromised and people that don't want to use Wi-Fi, but still want to operate wirelessly in their businesses or in their office buildings or in industrial settings and other places need to have another alternative. And those alternatives right now are generally called private LTE and there are several different flavors of private LTE. There is CBRS which gets a lot of press but CBRS is largely still an unlicensed resource and in areas where it is quasi licensed, it is only quasi licensed. And given the way that it operates, the clients of it have to move around in spectrum, operate through a third-party SaaS operator. I mean so it becomes very confusing, difficult and in some cases transient. The other option is to use spectrum like Globalstar spectrum and that is not subject to all of those vagaries that I was just describing. So now we have clients that are coming to us, in building clients for instance who see the inventory of buildings in the United States which number four for commercial office buildings something close to 7 million. And they're looking at that opportunity and going into enterprises and going into building owners. And going into large building owners, CBRE et cetera and cutting deals to provide private LTE inside these buildings. So we're focused on those opportunities because you can do a building and it in no way implicates what you might want to do with a carrier cable or tech outside. So it's it -- whether it's a building or whether it's agricultural or whether it's industrial private LTE is without a doubt here to stay. And it's not a market that the carriers really want to go after. It's complicated. You have to work through third parties which are why we have these arrangements with third parties. And something that is massive in its opportunity and again not compromising the ability to do something along the traditional lines that we've always wanted to do. It's a little bit -- so the real benefit that we-- the real differentiator that we bring to this private LTE opportunities really security, reliability and QoS, guarantee QoS. And that's where Band 53 plays really well when our customers need that type of requirements in their network.

Our next question comes from Simon Flannery from Morgan Stanley.

Hi. This is Alexis on for Simon. I just had a quick question, looking at the subscriber metrics for SPOT and Duplex in Q1. Is there any color that you can share on kind of how that checks out versus your expectations? And also is there anything you can share on your outlook for 2019 for subscribers or product launches in those segments?

Sure. Thanks for the question, Alexis. So first quarter subscriber declined for SPOT and Duplex actually met our internal expectations. We knew that churn was going to be in excess of gross activations as we focus internally on bug fixes and firmware improvements and in the case of X hardware enhancements and adding Bluetooth functionality. So while we're kind of just focusing on improving those products, we didn't really have a lot of devices being pushed into the market. So I expect that that to turn -- that will turn around in the second half of 2019 in both cases probably more materially on the SPOT side, but it's certainly something that we're focused on. We have several initiatives underway as Dave and I both alluded to in our scripted remarks.

Our next question comes from Jack Hartnett from Quadrant Capital.

Hi, good morning. Rebecca, could you speak to the financing arrangements that you're engaged in right? The -- another -- last quarter, I agree a few -- you mentioned a few things at least. You really mind, I spoke to the incremental solutions as opposed to fundamental change. We seem to be going from quarter-to-quarter answering this question and I think what we all agreed here is that the fundamental change is necessary and rather than just issuance of stock to comply to some covenant. So if you could expand on that please?

Yes. Certainly, Jack. So our management teams focus on this every day, and we don't want to have to continue to go to the markets every six months. We don't want that overhang. We want more runway more, more flexibility. So we definitely, we're not looking to just solve the June payments. We're looking for a longer-term, more permanent solution and we're balancing the interest of all the stakeholders we're working with. Our lenders to try to amend certain terms of the facility that would provide that flexibility and runway, so we can focus on other opportunities. Dave discussed in detail in his scripted remarks, but and we 100% appreciate that the shareholders don't want us to do something dilutive. And we're going to avoid that as much as possible. But again balancing that we do have requirements under the existing terms of our facility agreement that require us to make payment obligations in June. So focused on this I can promise you every single day, our strategic review committee has been incredibly supportive and helpful for this process. We have excellent financial advisors. So while nothing is guaranteed, I think that we are going to be successful in this outcome in due course.

Okay. Just a quick follow-up. Is that--is this also the area that's leading to the slowness in terms of our MOUs that are being executed, another is the --you've got --you are working with as I [grade] somebody can speak about the working with the listing spectrum, working with Memorandum of Understanding here and I'm assuming the slower, the slowness on this or the slowdown is coming from in part because of our precarious financial situations. Is that the case?

I would say in some cases depending on who the opportunities are with. If it's a very large corporation, the uncertainty certainly comes into their minds I believe. But, look we, this is --as far as, like Rebecca said, as far as we can tell this is going to be a short-lived problem and we're definitely focused and have a lot of effort focused on resolving it on a long-term basis and not going back quarter by quarter. So I wouldn't --I would say more so the technology and where we are with the Band 53 and the specific equipment that's required to deliver those. Look, we just got 3GPP at the end of last year. That was a key development that really prevented us from entering into those MOUs that we are now seeing now. And I think it's just the normal market cadence to get to where we are as opposed to anything specific related to our liquidity.

I'll make one another point. And that is that we actually have entered into a lot of agreements very rapidly. So the kickoff to that was 3GPP approval as Dave said. And now companies are coming to us with that approval behind us knowing that the band will show up in infrastructure, hence our arrangements with Nokia and Airspan and there will certainly be others, but it'll also show up now in user equipment. And there are two classes of user equipment. There's industrial stuff that you would see in a private LTE setting and there's consumer stuff that we're all familiar with like phones and so forth. I mean it's going to appear in all of those things now. So we actually have significantly accelerated the relationships that we have with third parties involved in private LTE such that we are we're entering into these Letters of Intent and Memorandum of Understanding. Similar to the pickup in the pace of those same agreements being entered into on the satellite side as well. I mean on the satellite side, those are one of them, couple of those that Dave mentioned in his remark that are very sizable relatively speaking in the near term that can change the size and scope of Globalstar. So I think everything is picking up. And on the financing question, we're going to solve it. We'll solve it in a way that Rebecca explained, but frankly most parties are not concerned about our financing because they've watched the financings happen routinely since 2008. And so it's not good to be as stressed as we have been on the financing, but when viewed from the outside that's less of a concern, maybe a bigger concern if your conversation is happening with AT&T, but less of a concern if it's happening with companies that just want to take advantage now of the 3GPPP approved band.

Okay. So if I understand the answer it has more-- probably it has more to do with the success of our signing an MoU, another as much sign let's say spectrum MOU, you've got-- you'll be able to go to the financing table with a lot more strength. And I'm assuming that's what I'm hearing here.

Well, certainly having these things signed is helpful to our financing effort. It's not, it's I don't know whether it's positive but it is definitely helpful to see people lining up that want to use the spectrum for sure.

But clearly it's important to note too that clearly just the core satellite business on its own is certainly financeable. And as you -- as a potential lender learns about the opportunities before us, I think they'll have great comfort in the operating plan going forward. Okay. I guess at this point we have no more questions. So we'll -- I'll just say couple of closing remarks. I mean, look, as we've all said here we're certainly laser focused on the liquidity issues before us. We're going to resolve them in the coming weeks. And we hope to have positive news as soon as possible. We are also focused every day on delivering on our initiatives on the spectrum side. We talked about a lot about the IoT growth and the enormous growth that we're seeing on the IoT front. And as well as, as Rebecca said working on our existing products and improving the revenue possibilities for those products, both on the SPOT side and a Duplex side. I think we're all here at Globalstar excited about what lies ahead and we're certainly going to deliver on what we have to do. Thank you very much. End of Q&A

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