Globalstar Inc (GSAT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Globalstar, Inc. earnings conference call. At this time all participants are in listen-only mode. Towards the end of the conference we will be facilitating a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Dean Hirasawa, Director of Public & Investor Relations for Globalstar, Inc. Please proceed.

Good afternoon, everyone. Thank you for joining us for today's conference call to discuss the results for Globalstar, Inc. for the quarter ended September 30, 2010.

Before we begin please note the following. This call may contain forward-looking statements within the meaning of federal securities laws. Factors that could cause results to differ materially are described in the Safe Harbor section of today's press release and in Globalstar's SEC filings, including the quarterly report on Form 10-Q for the three months ended September 30, 2010, which will be filed in the upcoming days.

The press release, this conference call and the associated slide presentation which is available on the Investor Relations page of our Company web site include discussions of certain non-GAAP financial measures, as defined under SEC rules. We have provided a reconciliation of each of those non-GAAP measures to the most comparable GAAP measure in the press release. Please note that the information in this call is accurate only as of today, which is Monday, November 8, 2010. Today's press release containing certain financial information is available on the Company web site at www.globalstar.com. Later this afternoon an audio recording of the conference call will be available via telephone dial in. And a webcast recording along with a copy of the slide presentation will also be made available on the Company's web site.

Today's call is being hosted by Mr. Peter Dalton, CEO of Globalstar, Inc. Joining Mr. Dalton is Mr. Dirk Wild, Senior Vice President and CFO. And from our office in Milpitas, California is Mr. Tony Navarra, President of Global Operations. Each will be available following their prepared remarks to take questions.

At this time I would like to turn the call over to Mr. Dalton.

Good afternoon and thank you for joining us. Since our last call in August several major Company accomplishments have been achieved, highlighted by the successful launch of six new Globalstar satellites. Over the next few minutes, we will summarize those accomplishments as well as our operational highlights for the recently completed quarter, and share with you our continued vision for Globalstar.

I'm happy to report that for the second consecutive earnings call Globalstar recorded its highest number of SPOT satellite GPS Messenger activations in a quarter. Thanks to the market success of Globalstar's enhanced new SPOT product, as well as the launch of the DeLorme SPOT Communicator the Company activated almost 18,000 new units, finishing a three month period ended September 30th with 431,782 total subscribers, or nearly 50,000 more than it had on September 30, 2009. Throughout the quarter Globalstar further established its unique and dominant leadership position in the mobile satellite retail consumer marketplace. The DeLorme PN60w with SPOT Communicator has already received numerous accolades including the recent "Popular Mechanics" science and technology breakthrough award and GearJunkie.com's best in show award at this summer's outdoor retailer show. As of today, Globalstar has received orders to ship more than 273,000 SPOT consumer units to the more than 10,000 retail points of distribution worldwide.

I'm proud to say that our role as the dominant and obvious leader in the MSS consumer market category was further underlined as SPOT has just been named by "Time" magazine to its list of 100 all-time greatest and most influential gadgets. SPOT joining this illustrious list of greatest inventions since the magazine began publishing in 1923 is just another testament to the innovative utility of Globalstar satellite technology. We expect to continue to demonstrate our engineering and consumer product design prowess in the months and years to come.

During the quarter Globalstar announced a relocation of its headquarters and other activities to Covington, Louisiana. Globalstar expects to take advantage of the state's reimbursement of relocation costs, plus a commercial lease subsidy for its new corporate headquarters, as well as future tax credits associated with state a list of state programs. Globalstar significantly values its partnership with the government of Louisiana, and looks forward to contributing to the positive economic developments facilitated by the various state programs. The company intends to maintain its software development and network operations including its satellite and ground operations control centers in California. This move maximizes the benefits of the Company's 2009 acquisition of Covington based satellite asset tracking and consumer messaging products manufacturer, Axom. Globalstar will be the first vertically integrated mobile satellite company featuring decreased pre-production costs and shorter time to market for its integrated wireless and satellite based consumer and commercial products.

For those of you new to these calls, Globalstar is authorized to utilize approximately 25 megahertz of global L and S-band mobile satellite spectrum to provide services to our more than 432,000 subscribers around the world. In July, the Federal Communications Commission (FCC) initiated proceedings to make additional mobile satellite services, or MSS spectrum, available for mobile broadband networks. The FCC announced it was taking steps to make additional spectrum available for new investment in mobile broadband networks by promoting flexible use and removing barriers while ensuring robust mobile satellite capabilities. In its recent notice of proposed rule making and notice of inquiry, the FCC also stated that three frequency bands that are allocated to the MSS are capable of supporting broadband services, including the big LEO bands from 1610 to 1626.5 megahertz, and 2483.5 to 2500 megahertz. Globalstar has filed extensive comments in this process and continues to engage in discussions with the FCC to further its recommendations in these proceedings.

October 19th ushered in a new era for the Company. Of course, the successful initial launch of our six new satellites dominated the headlines. But Globalstar also introduced the first of a number of exciting sales and marketing initiatives that we plan to roll out as we deploy our second generation constellation of satellites. These initiatives are designed to return the Company to a leadership position in our core mobile satellite voice and duplex data business. On the same day we were launching our satellites, Globalstar introduced a new GSP 1700 satellite hand set launch program. The 1700 satellite hand set is manufactured by QUALCOMM and it features industry leading CDMA voice quality. It is also one of the smallest and lightest satellite hand sets available in the North American MSS market. For a limited time, customers can purchase the GSP 1700 bundled with 12 months worth of unlimited air time for less than $750.

Last week, Globalstar initiative live demonstrations of its new tracking and theft recovery product at the International Boat Show in Fort Lauderdale, Florida. The new product, SPOT HUG, reports unauthorized vessel movement and tracking, should movement occur. It also features key alarms or alerts for items such as open hatches or doors, excessive bilge water, low battery voltage and un authorized engine ignition. The SPOT HUG received an enthusiastic welcome by dealer and customer visitors due to our demonstration display at the boat show. And we expect to introduce the product concept into other potential channels such as the motorcycle, automotive and RV camper markets in the near future.

Just to review, the company's product road map for this year and beyond includes the SPOT Satellite GPS Messenger, the marine unit SPOT HUG, our new SPOT Alarm Satellite Communicator, and SPOT Assist Roadside and Maritime Services. In addition, Globalstar expects to introduce additional SPOT based Simplex consumer devices over the next year. Of course we have now reentered the core MSS voice market with the GSP 1700 hand set and we expect to expand that market with a number of additional duplex voice and data products.

Coinciding with the launch of our new satellites and on return to the duplex voice market, we have introduced exciting new branding visuals for the Company including a fresh new logo which we feel more accurately represents our core products and services. Our new logo has already been integrated into a number of marketing and point of sale initiatives, and these will be expanded as we continue to reassert ourselves into the core MSS market, and as we deploy our new constellation. We have also refreshed our global web site with a new updated singular design that once fully implemented will offer our customers improved site navigation and uniform web messaging. At the same time, the new site reflects all the diversity and regional differences that make up our worldwide global customer marketplace. We believe both visual branding initiatives will also help energize our distribution network as we launch our new constellation. Both the Global web site and the new Company logo were developed by marketing communications leader, Ensign Company One, following consultation with a number of Globalstar, Inc. stakeholders, including customers and employees.

In a few minutes I will have more to say about our core value drivers but at this time I will pass the call over to Tony so he can provide us with the latest information concerning Globalstar's current and second generation satellites.

Thank you, Peter. Good afternoon, everyone. On October 19th, Globalstar successfully conducted the inaugural launch of our second generation constellation as the Soyuz booster launched six brand new Globalstar satellites into earth's orbit, exactly on time at our designed 52-degree inclined orbit configuration. After 4.5 years of concentrated effort, it is with great enthusiasm and excitement that we begin initiating our second generation satellite operations and look forward to the future services the constellation will support. I have to personally say we are really excited and pleased to finally be flying our new satellites. With all six satellites now safely in orbit, we congratulate and applaud all of our Globalstar employees worldwide and thank launch provider, Arianespace, as well as our satellite contractor Thales Alenia Space, our financing partners, and regulatory agencies for helping make this launch a success.

The satellites were dispensed into their phasing orbit at 920 kilometers as planned, one hour 38 minutes after launch. Command and control telemetry was received from all six satellites exactly as programmed, over our ground stations in Korea and France. Our satellite operations control centers commenced extensive testing and will begin to conduct the orbit raising procedures needed to move the new satellites into their orbital planes at an altitude 1414 kilometers or about 875 miles above the earth.

Our new second generation satellites are fully compatible with Globalstar's current mobile satellite voice and data products including our lineup of SPOT consumer products. Our satellites have a design life of 15 years. Therefore we expect our new constellation will secure our space segment to beyond 2025. Once the new satellites are operational, service availability and reliability improvements will benefit our satellite telephone voice and duplex data customers as well as our family of Simplex data and SPOT products. With each subsequent launch these customers can expect a progressive return to the high quality system access and data session performance metrics our customers enjoyed prior to 2007. Following extensive testing we expect the first two satellites of the first six to become operational within four to six weeks after launch. We also expect all six to be raised into their proper orbits and become operational within approximately three months.

In November and December, six additional second generation satellites will undergo final integration and testing at the Thales Alenia Space facilities in Rome, and in preparation for shipment to Arianespace launch facilities at the Baikonur Cosmodrome in Kazakhstan. Our second launch of six satellites is expected during the first quarter of 2011 once again using the reliable Soyuz booster which is the same launch vehicle used to send astronauts and cosmonauts to the International Space Station. Globalstar has contracted with Arianespace for the remaining three launches. A total of 24 satellites are to be launched and integrated with the eight first generation satellites that were launched in 2007. The second generation satellite launch process is expected to be completed through the summer of next year.

The goal of the first generation constellation continues to fully support our Simplex data and SPOT GPS Messenger customers who enjoy a high level of messaging quality and reliability. Our Call Times Tool, or CTT, also continues to function well for our two-way voice and duplex customers who demand the ability to forecast when they can reliably process high quality voice and data calls on a given day, predicted up to four days in advance.

Now that we have successfully launched our first six new satellites, we have also commenced deorbiting procedures for the selected first generation spacecraft, to make room for the first of our second generation satellites. During this process, certain first generation satellites have been positioned for deorbiting, or being moved within their orbital planes in preparation for the final orbit raising of the new second generation satellites.

So, again, we are very pleased to report that we are planning to place into service our first second generation satellites, and we would like to thank our American, French, Italian and Russian team members who are making the return of Globalstar's high quality of voice service and products possible.

I will now pass the call over to Dirk Wild who will discuss the financial performance and operating highlights for our third quarter.

Thank you, Tony. I would like to start by expressing how excited I am to join the Globalstar leadership team. And I'm looking forward to continuing to introduce myself to our global partners and investors over the coming year. I'm also looking forward to participating in the growth of Globalstar and being a part of this uniquely innovative and industry leading organization.

As we look to the quarterly financial results, during the third quarter of 2010, the Company reported total revenue of $18.2 million, compared with $17.6 million for the second quarter of 2010. This growth was driven primarily by increased SPOT service revenue as the recurring revenue base and SPOT subscribers continue to expand. The Company's adjusted EBITDA for the quarter decreased to a negative $2.2 million, versus a negative $0.3 million for the second quarter of 2010. This decrease was primarily driven by an increase in general and administrative costs, including increases in legal expenses, bad debt expense, and transition related expenses.

Although this financial performance is less than last quarter, we believe that the investments we are making now will reduce our long-term operating cost structure. And we remain optimistic about the near and long-term market opportunities and believe that the continued investment in our networks and products will best position the Company to return to a significantly improved long-term cash flow and profitability. The continued stability of our duplex customer base is evidenced by our ability to maintain a low duplex churn rate and stable ARPU. Duplex churn remains at 1.0%, which is near historic lows. Duplex ARPU is expected to continue to be stable in the near term, followed by an expected substantial improvement with the improved duplex reliability after our new satellites are launched and placed in service. Additionally, as we continue to expand our SPOT and Simplex service and product offerings, we expect an improvement in long-term Simplex ARPU.

As we await the return of reliable duplex service, we expect the continued stabilization of our duplex subscriber base, followed by a significant increase in new customers. Today our duplex subscriber base is over 105,000 subscribers. This substantial base of customers provides Globalstar a valuable platform to capitalize on improvements to our service reliability. The Simplex and SPOT subscriber base has grown to over 265,000 subscribers, representing a two year compounded average growth rate of over 39%. Our pipeline of new and ground-breaking products further provides an important avenue for growth, and we look to leverage our existing distribution network as we continue to introduce award winning products to the market.

In closing our principal initiatives remain the restoration of high quality duplex service, the continued growth of our Simplex and SPOT businesses, the introduction of new products to the market, and the improvement of our cost structure. As evidenced by our decision to relocate the Company to the New Orleans metropolitan area, we have a continued focus on operating cash flow improvement. We believe that the relocation best positions the Company for a sustained long-term lower operating cost structure. This move also highlights Globalstar's commitment to providing the industry's most innovative commercial and consumer products and services as we continue the integration of our product development operations. We also remain encouraged about the potential flexible opportunities to maximize the value of our spectrum asset but remain focused on building the MSS industry's leading organization.

I will now pass the call back to Peter for some closing remarks.

Thank you, Dirk. In summary, Globalstar's focus is based on being a uniquely diverse company with a strategic competitive advantage which is comprised of three major near term components. First of all, the launch of our new satellite constellation, plus our associated marketing and sales initiatives, well position the Company's return to being a leading provider of high value, high margin MSS voice and data services, as well as lower cost mobile satellite asset tracking services. Second, Globalstar is the undisputed leader in the MSS consumer retail category. We are the only mobile satellite company providing mainstream retail consumers with affordable, low cost MSS products and services, such as SPOT, and we expect to continue to grow this category with a number of exciting initiatives in the near future. Finally, Globalstar has authority to utilize approximately 25 megahertz of global satellite spectrum to service customers around the world, plus more than 19 megahertz of spectrum that we expect to use for ancillary dress drill component services once we have met the FCC's gating requirements. Some of our competition can lay claim to one or perhaps two of these components, but only Globalstar transcends all three major components of the MSS industry.

In closing, please be reminded of our key core value drivers. One, our MSS core business which in the past has generated significant EBITDA. Two, our consumer retail business where we have now received orders for more than 273,000 units worldwide. And three, our global spectrum business initiatives.

Thank you and I look forward to speaking with you again when we report our full-year results for 2010.

Thank you, Peter. That concludes the prepared portion of the presentation. We will now take the opportunity to answer questions. Operator, can you please proceed with the first question.

(Operator Instructions) Our first question comes come the line of Brian Esposito of KKS Securities. Please proceed.

Good afternoon. I just wanted to try to understand the delta on the EBITDA loss, and what is driving that. I did notice the cost of subscriber equipment sales is up significantly as a percentage of your total equipment sales, and I'm just trying to get my arms around that number, and how to think about that line item going forward. I know in the past you guys have been trying to manage that to a close to break even number, and as you start to ramp the business and start to ramp duplex and get your satellites in the air, how we should think about that. Because I'm trying to forecast your cash and your cash consumption and what it's going to take, particularly as you start paying interest payments next year on the Copac facility -- or December of next year.

Sure, Ryan, this is Dirk Wild. Let me see if I can take that. You are looking at the comparative to last year, and one of the things that was included in last year that is not included in this year is some sales of Gateway assets at high margins. Those were a one-time deal that occurred throughout 2009 but did not occur in 2010. So that's a difference when you compare it to prior year at the EBITDA line. When you compare it to last quarter, as I mentioned in my comments, we've had some increases in our general administrative expenses. Some of those are things that, for example, our legal expenses were higher due to some activities related to the regulatory bodies, responding to the comments at the FCC and getting prepared to launch the first launch, getting our licenses in order and what-not. I think that's the primary driver from quarter over quarter. I think as we go forward, we don't provide any specific guidance but we would expect to be at this level plus or minus over the next quarter or so and then improvements we would expect to see beginning next year.

That's helpful. And on the FCC front, as it relates to -- on two fronts. I know the FCC came in and had issue with the gating requirements as it relates to your Open Range relationship and so on. Is there any updates on the status of that? And then, two, when do we expect to hear from the FCC on the broader scope of their gating requirements as it relates to your spectrum?

Ryan, I don't think we know for sure when the FCC is going to respond. I think the general notion in the industry has been that it would be sometime next quarter. In the first quarter. But no one really knows for sure at this point. What was your first question?

It had to do with the open range in the last, there was some news releases recently as it relates to Open Range and their agreement with you. You guys had not met certain gating requirements, so they basically just told the Open range to go -- you guys can explain it better than I can. Go ahead.

The FCC did not extend the waiver that we were operating under and so this requires Open Range to find spectrum elsewhere. We fully expect to comply with the gating requirements and at some point in time in the near future we will be able to service those kinds of needs.

Great, okay. I will get in the queue, thank you.

Our next question comes from the line of Marco Rodriguez of Stonegate, please proceed.

Good afternoon, thanks for taking my call here. I was wondering if you could provide an update on the integration of Axom on where we are standing right now?

Marco, this is Dirk. I think that the integration of Axom is going very well. We have been able to roll out two new products that we discussed on this call. And it was largely due to the resources that we acquired in that transaction that we were able to do that. And that's going to give us the ability to rollout additional products as we go forward. So I think the integration has gone well. We have been able to see some improvements in our equipment margin for the products, particularly SPOT, that is also one of the other reasons why we did the acquisition.

Okay. Then, in regard to your recent satellite launches, if I understood you correctly, it sounded like time line wise you'll have two satellites operational for voice come late November, December and then the rest of the satellites in January of '11. Am I understanding that correctly?

Tony, you want to take that one?

Sure. Marco, the current plan is to have the first of the six satellites capable of providing service within the next four to six weeks, and then the next two satellites, which would be the second and third satellites that we launched, will go into service sometime towards the end of the year or in January. This is all dependent upon them getting into their proper orbits and that we complete testing. To complete the whole plan, clearly we would hope to have by the end of the first quarter, beginning of the second quarter, all of the six satellites in providing commercial service.

So you weren't referring specifically to the six satellites you just launched in terms of differentiating when they will be active, if you will.

Yes. In fact, let me say it again. Of the six satellites we just launched, the fist one will go into service sometime within the next four to six weeks. Followed by two more by year end or the first part of January, in the month of January, which would mean a total of three satellites of the six we just launched by the January time frame. And then the remaining three satellites of the six that were just launched will be placed into service late in the first quarter or very early second quarter.

I got it. Okay. In terms of the testing that you are currently doing with the satellites, is there any kind of color you could provide in terms of things that might be ahead of schedule or things that are behind schedule?

The color that I would provide is really primarily with what we call the bus of the satellite. That's the amount of charging of the batteries that's been achieved, the solar arrays being deployed on time. We are basically on schedule right now for all of the bus and power subsystems as well as the signaling, the telemetry signaling that goes back and forth from each of the six satellites back down to our ground stations.

Okay. Perfect. Then in terms of the SPOT business, 18,000 gross adds in the quarter, I believe you guys referenced in your repaired remarks. Is there any information or anything you can quantify what percentage, maybe a range, was DeLorme versus your, for lack of a better phrase, your older SPOT products?

Yes. I don't know that we release that kind of detailed information, but I will say that with the late deliveries of DeLorme that we experienced, the activation rate was very good as far as we were concerned.

Okay. And then I was wondering from a higher level if you guys could talk a little bit more in regards to the competitive landscape. There's been a couple little changes here in the industry in terms of a major competitor filing Chapter 11 and another obtaining financing for their next generation satellite. Can you talk a little bit about the landscape out there and how you see them?

We generally don't comment on what is going on with competitors. We are keeping our eye on the situation amongst and between the players, I'm sure just as you are.

Just some housekeeping items here. Looking at your press release in regard to your SG&A, as well, I see impairment of assets, severance costs and other one-time nonrecurring charges. Can you provide any additional color in regard to that and how we should be thinking about that line item going forward? And then also your depreciation and amortization spiked up a little bit from a sequential standpoint. How should we be thinking about that line item going forward? I'll jump back in queue.

There is a couple things here. As far as the impairment charge, that was related to our equity investment in Open Range that we impaired during the quarter. Regarding the increase in the depreciation, amortization and accretion, that was due to the accretion related to the contingent purchase price on Axom. I'm sorry, was there another one, Marco, that you asked? I think those were the two.

Yes, there were some other nonrecurring charges, about $900,000, or so in change.

I'm just looking for -- Marco, I don't have my -- let me see if I have my notes here that I might be able to answer that question. I might need to get back to you on the details of it. Marco, let me give you a call back and give you the details of that.

Okay, perfect. So the DNA, should we be thinking at the $7 million level, is how we should be thinking about it going forward?

Of course this quarter we will be putting into service the six satellites, so the depreciation will be increasing significantly for those satellites being put in service.

Okay. Great, thanks a lot, guys.

Our next question comes from the line of Lily Wu, please proceed.

Yes, thank you. Just some small accounting questions. You mentioned that the move to Louisiana will help improve cost structure. And is part of the EBITDA improvement. Can we get an idea of the scope of cost structure savings that we can look forward to in the coming quarters?

Yes, Lily, this is Dirk. That's why I mentioned that we will probably start to see those beginning next year. It looks like we are getting labor reductions in the order of 20%, somewhere in that ballpark for the functions that are being transitioned to Louisiana. As you know, we will be keeping our satellite and ground operations and network operations in California. But I think we will be able to see some significant cost reductions beginning in the first quarter of next year and then continuing thereafter.

Okay. And the 273,000 SPOT orders that were referenced in the press release, we should view that as confirmed backlog for shipping in the fourth quarter and first quarter, is that correct?

No Lily, that was actually our cumulative SPOT orders to date that we'd received orders for. Substantially all those have been shipped out and included in revenue.

Okay. Do we have an idea of backlog going into the holiday season, are we trending well, how does that look?

We don't report backlog like that, so I think that the holiday season looks good for us. But I'm not sure we can say much more than that.

Okay. When is the next launch time window?

Tony?

Lily, the next launch is currently planned for the late March, early April time frame, and that will be dependent upon us completing our testing with the current six satellites.

Great, thanks.

There are no further questions at this time.

Okay, Operator. With that we will conclude the call. Please, everybody on the call, to be aware that we will be posting a webcast recording of this call on our web site at www.globalstar.com. And a copy of the presentation will also be available on the investor relations page. If there are no other questions we'll say good afternoon and thank you for joining us.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect, have a great day.