Globalstar, Inc. (GSAT) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the Globalstar, Inc. Fourth Quarter 2019 Earnings Conference Call. My name is Adrianne, and I'll be your operator for today's call. [Operator Instructions] Please note this conference call is being recorded. I'll now turn the call over to David Kagan, CEO. David, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss our fourth quarter earnings. Following my prepared remarks, Rebecca Clary will provide a more detailed discussion of the results; John Dooley and Tim Taylor will join us for Q&A. Please note that today's 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. Today, we announced our quarterly earnings, and we're excited to report that our full Commercial IoT continues driving success. In 2019, we grew IoT service revenue by 26% and average subscribers by 13% to $17 million of service revenue and approximately 400,000 subscribers. Total revenue for the year was up 1% year-over-year but down 2% when modified for prior period accounting adjustments. Adjusted EBITDA was down 7% year-over-year due to our inability to increase subscriber growth beyond our average monthly churn of 2% for both our Duplex and SPOT businesses. The revenue and EBITDA weaknesses were primarily due to the delayed launch of our Sat-Fi2 products and decreased average number of SPOT subscribers because of additional competition and lower self-imposed pricing in an attempt to increase demand. Our SPOT X product is back on track after we improved pricing, firmware and added Bluetooth capabilities. We're now experiencing 4-and 5-star customer reviews. We've also created a commercial version of our Sat-Fi2 product called Sat-Fi2 Remote Antenna Station, and we're seeing early indications of success even though it carries a higher price point. We have many large business development initiatives underway to utilize our low-cost price advantage for the IoT markets, various aftermarket automotive opportunities as well as for the marine market. As I've indicated before, we're working hard every day to recoup the anticipated net decrease in our legacy sat phone business by developing innovative solutions and focusing on large IoT opportunities. However, it will take time given the larger customers that we're engaged with. We have a very strong pipeline of commercial IoT opportunities, many with the potential of thousands and some even hundreds of thousands of units. We're also miniaturizing and reducing the cost of our core technology to enable our value-added resellers to exponentially grow their business with price points and form factors never seen before in the satellite segment of the IoT market. Howard Trott, CEO of Recon Dynamics, one of our partners, was in our office a few weeks ago, and he called our new miniaturized IoT board a game changer for what Recon is doing. It's very early days, but we're very excited about our IoT prospects. On the spectrum front, we're continuing our work at 3GPP to make our band a 5G band and to add carrier aggregation, both of which we expect to complete by the third quarter of 2020. We have a strong pipeline of private LTE opportunities with our partners, while we continue our effort to drive wholesale demand for Band 53 spectrum. Our international spectrum regulatory efforts continued to progress on almost every continent, and we expect meaningful additional announcements by midyear. While 2019 revenue was essentially flat, performance was in line with our expectations as we reposition the company to focus on the IoT market and continue providing our consumer SPOT customers with flexible pricing, new enhancements and excellent value. At Globalstar, the team comes to work every day excited about the impact we're having on our customers' lives and the innovative solutions we're in the process of developing for new market segments. And now I would like to turn it over to Rebecca for a more detailed discussion of the results. Rebecca?

Thank you, Dave, and good afternoon, everyone. As previously mentioned, we expect that 2019 was a transitional year in many respects, particularly when compared to the record-breaking financial performance of 2018. However, we are optimistic that growth will accelerate based on early indications of the market's reaction to the 2 core products that we introduced in the second half of 2019. Commercial IoT continued to be the high point of our financial results during the fourth quarter with a 9% increase in ARPU, coupled with a 12% increase in the subscriber base when compared to the fourth quarter of 2018. Similar results were reported for the full year as Commercial IoT service revenue was up 26% from the prior year. The mix of rate plans among our subscribers generated higher ARPU in 2019 as our newest IoT product, the SmartOne Solar tracking device, generally results in higher usage and therefore higher service pricing than our legacy products. As the number of users of this device continues to increase, so does the blended ARPU of the base. New customers activating both the solar-powered product as well as legacy devices have expanded the Commercial IoT base, which now exceeds 400,000 subscribers. Hardware revenue generated from Commercial IoT products was also up during the fourth quarter and full year periods due to a higher volume of sales across all of our product types. Solar device sales have been generally incremental to legacy device sales, which indicates that our products and solutions are expanding with the market opportunities. We also continue to pursue a meaningful pipeline of sales opportunities in the IoT space and are working to expand the capabilities of our devices in order to provide the products to our resellers that address the growing needs of our subscribers. Earlier this year, we announced that we closed the acquisition of the intellectual property developed by Carmanah, the company that produced the SmartOne Solar. Anticipating growth and sales of this product, this acquisition is important as it will improve our profitability by increasing hardware margin by over 40%. The improvements driven by Commercial IoT were not enough to offset the impact from the decline in our Duplex and SPOT subscribers. Which was the primary driver of the slight decreases in service revenue when comparing quarter-over-quarter and year-over-year results. However, as Dave covered in his remarks, we have initiatives underway to combat these issues. We have already started to see stabilization of our SPOT subscriber base as gross activations increased in 2019 compared to the prior year driven particularly by the success of our recently updated 2-way SPOT X device. The changes in net income and loss during the period were driven by various financial statement items that aren't directly related to our core operations, including primarily noncash derivative gains and losses. After adjusting for these types of noncash items and other nonrecurring items that aren't representative of our core operating business, adjusted EBITDA was down 7% from 2018 and up 1% from the prior year's fourth quarter. These fluctuations reflect our earlier comments regarding 2019 being a rebuilding year. However, certain of our primary operating metrics began to show improvement in the fourth quarter, such as a 20% increase in SPOT activations and a 32% increase in the volume of Commercial IoT hardware sales. And now turning to the most important thing that we have achieved as a company during the year: a broad-scale improvement to our capital structure, encompassing a refinancing of our senior BPI facility agreement; the issuance of a new second-lien facility; and as announced earlier this week, the anticipated conversion of Thermo's $138 million subordinated loan agreement into shares of our common stock. I won't repeat the fulsome details of our refinancing that we provided in our call in early December. Instead, I will focus on where liquidity profile and balance sheet look like today. Our next scheduled principal payment of approximately $40 million is due in June of next year and is expected to be funded almost entirely by proceeds from the exercise of 2L warrants that expire in March 2021. We've reduced our total debt balance by $116 million from 1 year ago, including a $200 million decrease in senior debt outstanding. We also expect to have a fully funded business plan into 2025. Needless to say, we have a much stronger balance sheet, a simpler capital structure and more time to focus on running the business and monetizing our array of spectrum and network assets. With that, I will turn the call over to the operator for Q&A.

[Operator Instructions] And our first question comes from Simon Flannery from Morgan Stanley.

So Rebecca, I know you don't give formal guidance, but you gave a couple of data points there that I just wanted to make sure we were understanding appropriately. You said you attracted growth to accelerate. You also expect your hardware margins to improve 40%. So is it reasonable to think that you should have positive revenues in '20 versus '19? And is that going to sort of accelerate through the year and that margins should be a little bit higher? And Jay had referenced in his comments, we're still waiting the first dollar of S-band revenues. Is that something we could expect to see in 2020 as well?

Sure, Simon. So just to clarify a couple of my remarks, the margins I referred to of 40% increase, that's specific to our SmartOne Solar device. And so the acquisition that we made earlier in the year, we acquired basically the middleman to cut out some of the margins that we were losing. And so through that acquisition and reduced costs, we will increase the margin on the sales of that hardware by 40%. So don't expect that to be the increase across the board on a blended rate. And then in terms of growth accelerating, most of my remarks relative to that were around what we're seeing in terms of market response from sales, particularly over SPOT X, which we upgraded with Bluetooth technology in September, I believe, late in the third quarter of 2019. So it's -- we introduced it in a time of the year that's not necessarily our strongest time in the year. So taking indicators that we have seen, even through the last 4 months of 2019, is a very good indication that the sell-through will continue to improve, therefore accelerating and increasing our gross additions for SPOT in 2020 higher than 2019.

Okay. And on the kind of the opportunity to monetize, get $1 of revenue, first dollar this year.

Yes. This is Dave, Simon. Thank you for the question. While we certainly see a significant pipeline building with our partners, specifically for private LTE type of activities and opportunities, I think we'll -- by the end of the year, we'll probably be close to something. It certainly won't be material to our 2020 numbers, though, from all indications. But it's very possible that we could have the first dollar from private LTE type of service this year.

Great. We look forward to hearing more about that. And to that end, I think you had a comment in the release around just changing your disclosure, providing more fulsome information to investors. So is that the idea -- in addition to the quarterly calls that you'll also put out press releases, you'll do more intra-quarter stuff. Is that the idea?

I think really, the idea is to essentially, more or less, do away with the prepared quarterly type of calls like this one and do more fulsome investor press releases. And additionally, we're going to -- we plan to hold additional special investor calls and meetings as significant business developments occur throughout the year. So not to necessarily wait for the quarterly type of sessions like this, but to do it on a sort of like as-needed basis and get away from the route of these type of calls.

[Operator Instructions] And Simon Flannery is on line with a question.

Yes. So if I can come back with another one. There was also a reference to it being a complicated time with CBRS and C-band. So how do you think about -- we'll presumably get a mark on CBRS with the auction starting in June. How does this spectrum that you have do you think compare to CBRS in terms of power limitations and maybe people's ability if they're deploying CBRS to carrier aggregates and so limited to 40 MHz of licensed spectrum with the S-band. Is this something where you could see them working together?

Simon, this is John Dooley. I'll grab that one. I guess I think we look upon CBRS as a complementary resource going forward. And in fact, in the standards work that we're currently completing, you'll soon see the so-called band n53, which is the 5G variant of the 2.4 GHz band. And you'll see carrier aggregation combinations that take into account what we view as the inevitable blending of the 2 bands. This is, of course, of a different character than CBRS. CBRS will be a resource that we regard as lightly licensed. There's an unlicensed component, of course, and then there'll be a license component that -- and Steve can purchase AWS and have priority access to. We see ourselves as something that can be a secured, licensed, small-cell anchor that opportunistically uses CBRS as an additive capacity, much in the way that we've thought about the 2.4 GHz band is an anchor that uses the 5 GHz unlicensed band through LAA as an additive resource. So they have a very different character, but I do think they'll be complementary. And I believe what you'll see as the ecosystem evolves in the coming year that equipment that begins to enter the marketplace that's Band 53 and n53 compliant will have that bonding feature as a early element in its capability.

And how do the Band 53 power limits compared to CBRS?

So in terms of small-cell use cases, they're comparable. The Band 53 emissions limits are actually more liberal in the small-cell case. In the wide-area network case, obviously, there are higher-power options for CBRS that we believe will mostly be used in rural environments. We'll see how that market unfolds. So I think, in general, especially in urban and semi-urban environment, they'll have similar network topologies, similar effective ranges. And that's why one is a compelling complement for the other. What we've already seen in the market, and this has been reflected in some of the early private LTE interest in the band, is that CBRS is not being viewed as something that can be relied upon as a resource unto itself for high-priority enterprise and certainly for industrial applications were preemption, were noise floor issues or anything that's associated with either an unlicensed or a quasi-license resource is appropriate. And so that's, again, where we feel the similar footprints of the 2 services will be helpful in that we can guarantee the market a perfect noninterference-limited, non-preemption-limited resource that you can then layer on whatever available capacity there exists in CBRS in any given environment opportunistically, as it's needed.

Great. That's very helpful. But I guess what that probably means is you'll have a lot more interesting conversations after the auction is over and people know what they have and where they have it.

Well, I think that is helpful. But even today, many of the use cases, frankly, that are reliant upon CBRS are making an assumption that they're going to be using the GAA channels. And then if there are available panels that are economically interesting, yes, that will be an additive resource. But I think most of the assumptions, at least in the early work, has been to say what can we make of this from a GAA perspective, and that's something we can have a certain idea of right now.

[Operator Instructions]

Okay. Operator, given that there's no one else in the queue, I think I'll wrap up then, please. So looking back on 2019, it was essentially a flat year for us, especially on the revenue front, as we expected. And as we continue to transition away from our sat phone business, we surely believe that we made the right decisions to position Globalstar for the future, and we're starting to see those -- the fruits of our labor show in our Commercial IoT segment and in the growth that we experienced throughout 2019. We look forward to speaking with all of you as our business continues to develop and in the future. Thank you very much for your attendance.

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