Globalstar Inc (GSAT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Globalstar Incorporated Third Quarter 2011 Earnings Conference Call. As a reminder, this conference is being recorded for replay purposes. (Operator instructions.)

I would now like to turn the presentation over to Mr. Dean Hirasawa, Director of Public and Investor Relations. Please proceed, sir.

Thank you, Operator. Good afternoon, everyone. Thanks for joining us for today's conference call to discuss the results for Globalstar Inc. for the three-month period ended September 30, 2011.

Before we begin, please note the following. This call may contain forward-looking statements within the meaning of federal securities law. 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 Quarterly Report on Form 10-Q for the three months ended September 30, 2011, which will be filed shortly.

The press release, this conference call, and the associated slide presentation, which is available on the IR page of the Company website, includes discussions of certain non-GAAP financial measures as defined under SEC rules. The press release provides a reconciliation of each of those non-GAAP measures to the most comparable GAAP measure. Please note that the information in this call is accurate only as of today, Tuesday, November 8, 2011. Today's press release containing certain financial information is available on the Company website at www.globalstar.com. Later today, an audio recording of the conference call will also be available via telephone dial-in and a webcast recording, along with a copy of the slide presentation, which will also be made available on the Company website.

Today's call is being hosted by Mr. Jay Monroe, Chairman and CEO of Globalstar Inc. Joining Mr. Monroe are Mr. Dirk Wild, SVP and CFO, and Mr. Tony Navarra, President of Global Operations. Each will be available following their prepared remarks to take your questions.

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

Thanks, Dean. I've been back as CEO for a short period of time now, and when I returned, I undertook a complete review of Globalstar's operations. When this review was completed, we concluded that the Company needed to focus a bit more narrowly on a proven set of profitable products and to eliminate certain other initiatives that we were involved in.

This renewed, narrower focus, necessitated primarily by delays in Thale's satellite delivery, has led us to trim our costs and optimize the organization while we complete the launch of the new satellite, Constellation. Therefore, during the next year, we will be emphasizing certain key initiatives - the re-launch of voice and data services. This includes actively marketing to new subscribers where we can leverage our competitive advantages, including unparalleled call quality, superior pricing, and faster data speeds. We are also pleased to welcome a new Director of Marketing, Robbie Herzig, to help drive this process. Robbie will also continue our successful marketing strategy regarding the SPOT consumer product and our Simplex data products for enterprise customers.

This focus will center around SPOT 2, our new SPOT Connect texting product, as well as our Smart 1 and other commercial asset tracking solutions. Additionally, we will continue our search for a permanent replacement for Dirk Wild, our CFO, who will be leaving the Company at the end of this week. And finally, we will continue to engage in discussions with the FCC regarding our ATC Spectrum authority. As many of you know, similar discussions have been ongoing for many MSS providers, including LightSquared, [DDSV] and TerreStar, through recent filings and dockets in order to obtain ATC authorizations and waivers.

During the quarter, there were a number of highlights that I'd like to talk about for a moment now. First, Globalstar successfully launched six new satellites from the Baikonur Cosmodrome�in July. We expect to conduct two additional launches of six satellites each in the upcoming months. With each of these launches, our customers who use voice and data services will expect to see progressive improvement in reliability and in performance. Tony will provide a complete space operations update shortly.

Also during the quarter, we announced that the French minister in charge of space operations has issued Globalstar its final authorization to operate the new second-generation Constellation. This allowed us to operate our new satellites over the United States, which was dependent on the completion of this foreign registration. Therefore, in September, we were pleased to announce that North American voice and data customers were starting to see improved coverage and call performance thanks to the new operational satellites and the ability to use the gateways to support our two-way voice and data services in North America.

During the quarter, we also continued to see strong growth and interest in our commercial Simplex and Spot consumer products. During the quarter, we activated over 30,000 of these units. We also continued to see growth and interest in our SPOT Connect product, which provides text messaging from virtually anywhere over satellite for customers with SmartPhones.

Now, Tony is here to provide you with an update on our satellite launches.

Thank you, Jay, and good afternoon, everyone. Over the next few minutes, I'll provide you with our quarterly space segment update. Our third quarter was highlighted by the July launch of six new second-generation satellites, the delivery of the satellites for our third and fourth launches, and the French ministry authorization of our new Constellation, which paved the way for the start of improved second-generation satellite services for our customers in North America.

Operationally, we have focused our efforts on orbit raising the satellites launched in July and preparing the next six satellites for our next launch. On the subject of orbit raising, two of the six satellites launched on July 12 were placed into service in August and September. We expect that the remaining four satellites will be raised into their final orbital planes and become operational over the next three months. In addition, all six satellites from the first launch in October 2010 are in their final orbital planes.

And right now, we're in the final decision-making period for our third launch, currently scheduled for December. We have six fueled satellites mated with the dispensers in Baikonur. The dispenser and the fueled [Fregat] upper stage are being readied for launch. We've also been notified by our launch services provider, Arianespace, that they and their Roscosmos team partners are fully prepared to launch in December.

Our launch is expected to be the 1,780th successful launch of the Soyuz launch vehicle, which dates back to a first flight in the 1960s. Our third launch will occur after the successful Arianespace Soyuz launch with two Galileo satellites, a recent cargo launch to the International Space Station on October 30th, and an expected manned flight to the Space Station, which is scheduled for November 14th.

In the coming weeks, Globalstar and Thales Alenia Space officials will hold meetings in order to conduct reviews of the status of the six new satellites slated for the third launch. Additionally, Thales Alenia Space has completed final assembly, integration and tests for all six satellites for the fourth and final Globalstar launch, expected to be conducted in the first quarter of 2012. Two of these satellites are already in Baikonur, and the remaining four are in their shipping containers in Rome, prepared for shipment in late November to the Baikonur launch site.

As previously announced, Globalstar, Thales Alenia Space and satellite subcontractor Goodrich Aerospace have continued to work on multiple solutions for the momentum wheel anomaly that has affected some of our previously launched second-generation satellites. That process is ongoing, and we hope the successful resolution in the coming months that will permit all of the affected satellites launched to complete their entire 15-year mission.

Thales recently informed us that there were indications that the momentum wheels on certain satellites launched in July could also experience anomalies. We will not proceed with our third or fourth launches without the further assurances from Thales Alenia Space that we will not experience wheel issues with these satellites as we have with some of our previously launched satellites.

Globalstar and Thales Alenia Space also continue the arbitration process that we initiated to allow Globalstar to purchase additional satellites at the prices provided for under our contract and for which Globalstar has prepaid approximately EUR65 million. Globalstar has actually placed an order for satellites which Thales has, thus far, refused to begin manufacturing. Although this process is expected to last for several months, it does not impact the manufacture and delivery of the remaining first 24 satellites that are currently being delivered and prepared for launch. The arbitration has been scheduled for January 2012, so we expect resolution shortly thereafter.

In summary, we intend to complete the launch [for] the new Constellation as soon as possible in order to establish a Globalstar Constellation that will return us to the highest quality mobile voice and fastest satellite handset data services and continue our success with machine-to-machine messaging and SPOT consumer services.

With that, I will now pass the call over to Dirk Wild, who will discuss the financial performance and the operating highlights for the third quarter of 2011.

Thanks, Tony. The Company reported total quarterly revenue of $18.2 million during the third quarter of 2011, on par with $18.2 million for Q3 2010. Quarterly year-over-year service revenue grew from $13.4 million to $14.2 million, while equipment revenue decreased from $4.8 million to $4 million. The Company's adjusted EBITDA loss for the quarter improved from $2.1 million for the prior year period to $1.6 million for the current year.

While Globalstar's net loss improved to $0.7 million for the quarter versus $24.5 million for Q3 2010, this was primarily driven by a $23.8 million derivative gain versus a $9.2 million loss for the year-ago quarterly period.

The increase in service revenue is attributed to the continued growth of our SPOT and commercial Simplex subscriber base and a year-over-year increase in contracted engineering services. We are pleased to report over 30,000 gross subscriber additions for the quarter, which is the highest quarterly performance in the Company's history. This important achievement is indicative of the Company's success in the SPOT and commercial Simplex business models, and we anticipate that this is representative of the performance we can expect for Duplex after successfully completing the deployment of the second-generation Constellation.

As announced at the end of September, management began a plan to implement an improved cost structure by both, one, reducing headcount by approximately 60 full-time employees, and two, reducing non-employee contractor costs. Management is also working to implement reductions in non-employee operating expenses. These changes were primarily driven by the satellite delivery delays by Thales, which has impacted the revenue recovery of the Company. While the positive effects of this effort will not be seen in the financial results until the fourth quarter, the plan represents an important step towards near-term profitability.

At September 30, 2011, Globalstar's liquidity included $6 million in cash, $8 million remaining on our COFACE senior debt facility, and $60 million of contingent equity. Consistent with the terms of Amendment 7 to our COFACE facility entered into in September 2011, the Company can use the contingent equity of funds for operating expenses, inventory purchases, and principal and interest payments. In addition, the Company may use funds in the contingent equity account to pay capital expenditures provided that we raise proceeds from the issuance of equity or subordinated debt in the same amounts as the contingent equity withdrawal.

On November 3, 2011, the Company made an initial draw of $5.4 million from the contingent equity account, and we'll use these funds to pay operating expenses and make inventory purchases. Globalstar expects to continue to make near-term draws of contingent equity. By using these draws to fund ongoing operating expenses, this will allow the Company to use cash receipts from revenues to fund capital expenditures.

Let's look at our primary short-term capital requirements and put these into three categories. Now, these numbers assume that we complete third launch in December and the fourth launch in early 2012. Since launch-related capital requirements are tied to launch timing, any delay in the launch campaign will push back the timing of those payments.

First, to complete the remaining launches, number three and number four, total capital requirements are approximately $23 million for the remainder of 2011 and $21 million in 2012. In order to fund these launches, the Company intends to use its remaining COFACE availability, cash on hand, plus future cash receipts from revenue, in addition to any proceeds from the issuance of equity or subordinated debt to capital raises and a matching amount of contingent equity, if applicable.

The second category of short-term capital requirements relates to principal and interest payments. The Company's COFACE requirement through Q3 of 2012 include interest payments of approximately $15 million and a principal payment in June of approximately $17 million. Additionally, cash interest on the 5.75 convertible notes due in 2012 is approximately $2 million. These amounts can be funded by draws on contingent equity or other available cash on hand.

In addition, the Company intends to request the delay of the first COFACE principal payment. Our senior lenders have previously indicated a willingness to review this request following the final two satellite launches.

The third category, total ground capital commitments, are estimated to be approximately $59 million through Q3 2012. We note that we continue to work with our ground suppliers to arrange deferrals of certain payment terms in line with the timing of our comprehensive financing plan. As we discussed on last quarter's earnings call, we continue to work towards securing a long-term senior debt facility to help fund future capital expenditures, including the remaining portion of our second-generation ground infrastructure and the construction and launch of additional second-generation satellites beyond the first 24.

Going forward, Management remains focused on continuing to improve the Company's operating cost structure and increasing revenue. However, profitability will be mainly driven by the Company's ability to increase [d-flex] pricing and revenue current with the return to quality coverage upon the deployment of the second-generation Constellation.

Let me now pass the call back to Jay for some closing remarks.

Okay, Dirk, thank you very much. I appreciate it.

To conclude, let's discuss the key value drivers which have remained largely unchanged over the past few years and upon which we will execute with the new Constellation. First, we will return to our core voice and data products. We are the highest quality, lowest latency, and lowest cost provider of these services. Historically, the most significant driver of our cash flow has been this high ARPU customer segment which utilize these voice and data services.

Secondly, we have a tremendous family of SPOT retail consumer products and services and a distribution network of over 10,000 stores. To date, we have taken orders to ship approximately 350,000 of these consumer products.

Thirdly, we have a range of commercial Simplex and reliable machine-to-machine asset tracking products. These are designed to address the need for small, cost-effective solutions to send data, such as location data from assets in remote locations and assets which are on the move.

Lastly, Globalstar has a global asset of approximately 25 megahertz of worldwide spectrum. Roughly 20 megahertz of that is conditionally approved for terrestrial application in the US.

The next few months are key to the long-term success of Globalstar. By the time we hold our next earnings call, we expect to have completed the launches of our new Constellation. Most importantly, we will be executing programs and initiatives to take advantage of all of the renewed services our new satellites have to offer.

I thank you all for your time today, and we are now available to answer some of your questions.

Thank you, Jay. That concludes the prepared portion of presentation, so we will now move to our Q&A. Operator, can you please proceed with the first question?

(Operator instructions.)

Alex Sammarco with Stark Investments.

Hi, thanks for taking the question. First, just want to say congratulations on keeping the subscriber numbers relatively stable and on the improvement in the EBITDA.

The real question that I have is for Tony, and that pertains to the statement you made with regard to the potential issue on the July satellites. And my question really is have you noticed any additional trending in the momentum wheels on any additional satellites, whether they be from the first or second launches? And then, if you could just provide a little more detail on the solutions, multiple solutions that you're working with Thales on fixing those issues? Thanks.

Thanks, Alex, for that question. First of all, the only trending that we have noticed, which is new since our last earnings call, is on batch two. And as we described on the call, there's some additional trending in the friction, in other words slight increasing in friction on two of the satellites. And at this point, that is the work that's ongoing, both at Goodrich and at Thales, to determine what could be causing that trending or increase in out-of-family performance. And cannot give you at this point the solution because the root cause is still being identified, and we hope in the next weeks to better understand what's caused that trending.

Thanks.

Marco Rodriguez with Stonegate Securities.

Good afternoon, guys. Thank you for taking my questions. Tony, a follow-up in regard to the previous question on the July satellites. Correct me if I'm wrong, but I remember last time you guys had said the July satellites were as free of the momentum wheel issues. Is that kind of a change from now?

Yes, Marco, thanks for that question. In fact, prior to the second launch, we felt we had under control all the known dynamic performance characteristics of the wheels, and we had been informed by Thales and by Goodrich that they understood the conditions by which the wheels operated from batch one, and we were flight-worthy to fly the second batch, which is clearly why we chose to launch the satellites in July. And since those wheels have begun to perform, as I suggested to Alex in the previous question, we've seen some increase in friction, in other words a performance that's a little out of family.

And frankly, what we've been told now is that there may be an additional or a different failure that we have to watch very carefully, and that's what we're going to do over the next coming weeks.

Okay. Any way you could possibly perhaps handicap that situation and the December launch coming up here?

We are preparing in the normal course for the launch in December, but right now I can't handicap it. We should know a great deal more in the next few weeks.

Okay. And then assuming that the satellites go up as planned here in December and then in Q1, is there anything that you could do that could perhaps expedite the testing once they're in orbit?

Well, what we have been doing so far to try to fill the orbital planes as quickly as possible is reduce the early acceptance of the satellites when they're first placed into the orbital planes. And that is essentially done in the first week or so on -- or in their transitory orbit.

Marco, what really happens is the final acceptance for the satellites are performed usually a month or two later as they reach their operating orbital plane, but what we have done is try to make certain that the satellites operate properly within the first week of launch. And after that there's not too much you can really do to get the satellites to their proper plane unless you either use a lot more fuel or take some other risks, which we don't want to do, to get the satellites to their final operational altitude and orbital plane.

Got it, got it. Thank you. And then, in regard to you guys' discussion on certain initiatives, the hiring of marketing personnel, can you provide any sort of details in regard to what you're looking at and what we should be expecting?

Marco, can you elaborate on the question just a little bit?

Yes. With the launch of the satellites you have, the 12 up there operational, you have another six going up here in December, you mentioned that you hired a VP of Marketing, are there any specific marketing initiatives that you're working on that you're planning on rolling out in the next, say, three to six months that haven't really been discussed as of yet?

Thanks. I understand the question better now.

Certainly from a marketing perspective, we're evaluating dozens of plans, and we're looking, to the maximum extent possible, to bring products into service in the period before all of the satellites are fully in their final plane. Obviously early revenue is better than later revenue, and so we're looking at all opportunities for that.

We're focusing intensively on the four products that I mentioned before, the 1700, which is a high ARPU phone product, commercial Simplex, and two predominant SPOT-derivative products, SPOT 2 and Connect. And so we'll be putting marketing muscle behind all of those. Each of them are pretty distinguishable, and therefore are marketed differently, and anticipate a pipeline of approaches to that over the next six months. Nothing that we've published yet for outside consumption, though, Marco.

Okay. Do you anticipate rolling out some of these plans here in the next three months, or what will the timing be like?

Oh, definitely. We definitely plan to roll out a lot of different marketing during the next three months, for sure.

Okay, got it. And then, in regard to the COFACE debt facility, you have an EBITDA covenant here for 2011, sort of implying a very healthy, positive EBITDA for Q4. Can you give us your thoughts around that?

Yes. Hey, Marco, this is Dirk. You know, we do have that covenant. I think it's a positive $2.5 million for the 12 months ended December 31, and we're running short right now. We're probably not expecting to reach that as far as the actual EBITDA calculation, but we have a cure that allows us to use the proceeds of any equity or subordinated debt, the proceeds, to add to cure that. So we have completed that $38 million raise in June, and so there's no risk of a problem with that covenant at December 31.

Okay. And lastly, I was wondering if you could talk a little bit about gross margins in the quarter. The service margins seemed to be a little bit low in comparison to recent quarters. Were there any items that kind of drove that down sequentially? And how should we be thinking about that, going forward?

When you're talking about service margins, are you talking about service revenue minus cost of services?

Correct.

Yes. So included in cost of services are some things, for example, like severance. That's probably one of the bigger drivers for reduction in margin. As we said, we had that reduction in force that occurred during the quarter, and that increased those costs. So I think if you back that out, that probably will normalize it for you.

Okay. And can you quantify what that amount was?

The severance?

Yes.

The severance -- I think we've got it in our reconciliation here -- $668,000 for the quarter.

Okay. Apologize. And lastly, I'm not sure if I caught, and I apologize again, you were talking about the reduction of employees and a focus on cost-cutting, but I thought I heard you say that won't be recognized until Q4. Can you provide a little more color around that? Are you expecting your SG&A to drop substantially? How should we be thinking about that?

Yes, that's exactly right. We recorded those severance costs in Q3, but we won't actually get the reductions in the run rate until Q4. And I would expect that you'd get it in the MG&A as well as cost of services, but probably more heavily weighted to MG&A.

Got it. Thanks a lot, guys.

(Operator instructions.)

Brian Davidson with Stark Investments.

Hey, guys, how you doing?

Good, Brian.

Sorry, Alex is on the road, so we're going to have to double-team you here a little bit.

I just had a couple clarifying questions. First, Tony, when you said earlier in your presentation that you expect the remaining four satellites that are up there to be fully functional within the next three months, did I get that right?

Brian, that's correct. They are on their normal path to get to their altitudes and each be in a position between now and January.

And I just apologize if I'm confusing matters, but are any of those satellites -- are all of those satellites affected by the momentum wheel issue?

The only trending, Brian, that we've seen so far is that one of those satellites may be affected by this anomaly or this degradation that Thales has informed us of most recently.

Okay.

Brian, this is Jay - a clarifying statement, though. It was a wheel -- there actually were two that Tony talked about, but they're on separate satellites. So if -- we're always with one redundant wheel on these satellites.

Okay. And is there a date where you'll have to have clarification or confidence that you're going to be able to go forward with this third launch? Or I'm sure there is a date. When will you have to know whether this potential problem is going to cause a delay?

Brian, clearly we will need to have all the information possible from both Thales and Goodrich by the end of this month. And at that point, we will have to make a go, no-go decision on the next launch.

Okay. And if the unfortunate happens and you aren't able to go forward, can you kind of quantify the costs that have already been incurred, or costs related to the launch that you'll incur?

Well, not really looking into that kind of an outcome. The first and foremost cost would be the satellites themselves, which are obviously paid for. The launches themselves have been paid for. So there may be some additional labor that we would incur by having a small launch team fly from here, or the other companies, out to Baikonur.

But the big capital expenditure has been paid for the next two launches, and I can't speculate really, going forward, as to what the final outcome will be for these wheels. As Jay's described, we will get the next four satellites from the second launch into their operational planes and to provide service, because the current degradation that we understand, coming back from both Goodrich and Thales, won't affect their going into service in the next few months.

Okay. And then--?

--Brian? Hey, Brian? Just a little bit of a further clarification for others that might be listening and aren't as close to it as you are, too. The solutions that Thales and others are working on to correct what's going on in the wheels are not unknown in the satellite industry. Wheels are on every type of satellite ever developed and flown, and periodically they have challenges. And when they do, you develop software fixes, or other fixes, to eliminate that problem over time.

And so there's no assurance that you will solve this, but there's every reason to believe that you will, given the history of the industry. And so though we hope to not have any further wheel experience with anything else in space, the solutions that Tony and Thales and Goodrich are working on will hopefully give us the Constellation that we expected for the time that we expected it, which is 15 years. And I'm reasonably hopeful and optimistic that that will exactly be the result, though it'll take many months in order to work through those issues.

Okay. And then just a couple other sort of clarifying questions. With respect to the arbitration, is it possible just to kind of summarize what the expectations from your end are? In other words, what is the arbitrator going to decide? Is it going to be [yes], this is a binary outcome, or is there some room for something in between? Or I just want to get a better sense for what your expectations are as -- maybe not to the result but the potential outcomes.

Okay. Generally speaking, this is not a mediation, so it's not a situation where you're getting people together in a room and trying to figure out how to split the baby. It is an arbitration, where the arbitrators are attempting to take a view towards the legal issues associated with the contract. Our view is that we have the right to order additional satellites under our contract at known pricing.

Thales' view is that the dates for that have gone by, and therefore you can, under certain circumstances, order more satellites under the contract, but the price is subject to what is called "equitable adjustment." The equitable adjustment price to us means a continuation of modest price increases with the passage of time, which ran about a percent per quarter, which is roughly double to triple the actual rate of inflation. So we consider that to be a reasonable price. Thales has a very different view that does not feel to us to be equitable adjustment at all.

And consequently, when we sit in front of the arbitrators, we hope that they will agree that we have the right to purchase additional satellites, which we have already ordered and they have refused to begin manufacturing of, and at what price. It's conceivable that we'll get a result that gives us everything that we want, maximum number at the lowest possible price. It's possible that the outcome could be that they find for Thales and find that we can't acquire additional satellites at the prices that are still in the contract today. That is the fundamental situation we find ourselves with.

The bottom line is Thales is in the business of manufacturing, and we're in the business of purchasing. So you'd think that there'd be a way to reach an understanding.

Right. And is it reasonable to think that, given what you just said, that there could be some sort of a different result outside of arbitration?

Oh, I'm forever hopeful that something will happen outside of arbitration because, almost by definition, it'll happen sooner, and that's better for us. We don't go to the arbitration till the last week in January, so you likely don't get a final result until the end of February, and we'd like a result sooner if we possibly can.

And I presume this is binding arbitration?

It is.

It is. And then just couple other little things. Dirk, you mentioned the possibility of being able to delay the first payment to COFACE, but I didn't catch the amount and when it's due.

So it's about a little less than $17 million, and it's due in June of 2012.

And when would the next payment be due?

In December 2012.

Okay. And then, lastly, I know you mentioned that you guys did draw on the contingent equity line. In the future, as you draw on that, would you expect to be making 8-K filings, or is that something that you'll just report on with the quarterly reports?

Brian, we've told everybody here that we're planning on continuing that, so I'm not sure that we're going to be required to do an 8-K filing. I probably should talk to my SEC counsel before I give you a final answer, but it's our intention to continue to draw on that line for the foreseeable future.

Okay. Great. Thanks a lot, guys, appreciate it.

Thank you, Brian.

Operator, I think we have time for one last question. Is there anybody else in the queue?

Yes, we have one question from the line of [Charles Lanford] with [Lamphrey] Capital Management.

Hi, this Chick Lanphier. I have a question about the line with the French banks. To what extent has that been utilized?

Chip [sic], we entered into the COFACE facility in the summer of 2009, and we've been using that, drawing on that facility since then, and we're -- effectively tapped it out. We have all but $8 million left to draw on that facility, so we've drawn almost $600 million.

Got you. You have the money.

That's correct.

That's what I needed to know. Thank you.

Okay. Thanks, Chip [sic].

Okay, Operator. If there no other questions, we'll bring the conference call to an end.

And there are no further questions.

Thank you. Thanks again to everyone for joining us, and please be reminded that, later this afternoon, an audio recording of the conference call will be available via telephone dial-in, and a webcast recording and a copy of the presentation will also be made available on the Globalstar website.

Thank you, and good afternoon.

Ladies and gentlemen, we thank you for participating in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.