Globalstar Inc (GSAT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and full-year 2011 Globalstar earnings conference call. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dean Hirasawa, Director of Public and Investor Relations for Globalstar. Please proceed.

Thank you, operator, and good morning, everyone. Thank you for joining us for today's conference call to discuss Globalstar's three-month and full-year results for the period ended December 31, 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 differ materially are described in the Safe Harbor section of today's press release and in Globalstar's SEC filings, including the annual report on form 10-K for the period ended December 31, 2011, which will be filed soon. The press release, this conference call, and the associated slide presentation, which is available on the investor relations page of our Company website, includes a discussion 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 the information in this call is accurate only as of today, Monday, March 12, 2012. Today's press release contains certain financial information, is available on the Company's website at www.globalstar.com. Later today, and audio recording of this conference call will also be available via telephone dial in, and the webcast recording, along with a copy of the slide presentation, 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 Corporate Controller Rebecca Clary and President of Global Operations, Tony Navarra. Each will be available for questions following the prepared remarks. At this time, I would like to turn the call over to Mr. Monroe.

Thank you, Dean, and good morning, everyone. Globalstar has had many significant accomplishments throughout 2011, and we ended the year in rather dramatic fashion with a successful third launch in late December and fourth quarter financial results that mark a turnaround for our business and our share holders. I'll discuss these events in more detail later in the call. But first, we will lead off with a review of the Company's financial performance by Rebecca Clary, Globalstar's Corporate Controller. I'll then provide an update on some important milestone activities for the Company, followed by a Q&A session, in which Rebecca, Tony Navarra, and I will be available to respond to questions.

I'm pleased to introduce Rebecca Clary to the earnings call. Rebecca is Globalstar's Controller and a tremendous asset to the Company. She came to us from PricewaterhouseCoopers as one of the many talented people recruited when we transitioned our headquarters to Louisiana. Rebecca is here to provide a review of our financial results for the fourth quarter and for the full year 2011. Rebecca?

Thank you guys, and good morning, everyone. I am pleased to report that in the fourth quarter of 2011, the Company had positive quarterly adjusted EBITDA for the first time in four years. The Company's adjusted EBITDA for the fourth quarter was $1.6 million, an improvement of $5.9 million from the fourth quarter 2010. This improvement was due to a combination of increased revenue and a reduction in operating expenses as we improved and streamlined our operations during the quarter. With the renewed focus on our core operations, we were successful in reducing operating expenses, excluding EBITDA adjustments, by approximately $5 million or 24% for the fourth quarter 2011, compared to fourth the quarter 2010. Approximately 50% of the expense reductions were payroll related. The remaining cost reductions related to all other areas of the Company's business. We believe these expense reductions are sustainable in 2012 before considering prudent investments in the Company's business processes and IT infrastructure.

Our revenues increased $0.9 million to $17.4 million in the fourth quarter 2011, compared to $16.5 million in the fourth quarter 2010. Service revenue grew $1.4 million while equipment sales revenue decreased $0.5 million. The growth in service revenue resulted primarily from a $2.3 million increase in SPOT and commercial Simplex revenue. This increase resulted from the continued growth in our subscriber base. The average number of SPOT subscribers increased 35%, while the average number of Simplex subscribers increased 8%. This revenue growth was offset by a decrease of $1.1 million in duplex service revenue. Although the significant satellite delivery delay by [Telit] had impacted the Company revenue recovery, we expect duplex revenue to increase with continued service level improvements as additional second-generation satellites are placed into service for late 2012. Equipment sales revenue decreased due primarily to the delays in the production in the Simplex asset tracking product developing from a change in manufacturer during the second half of 2011.

Adjusted EBITDA for the year end December 31, 2011 also improved compared to 2010. Adjusted EBITDA was a negative $3.6 million in 2011, an improvement of $4.9 million over 2010. This improvement was less than the quarter-to-quarter improvement because our cost saving initiatives were not implemented until the end of the third quarter, 2011. Total revenues for the year also increased by $4.9 million. The Company's net loss in the fourth quarter 2011 increased by $15.6 million to $33.7 million. This was driven primarily by non-cash items, including a $10.3 million derivative loss in the fourth quarter 2011 as compared to a $12.2 million derivative gain in the fourth quarter of 2010. The Company's net loss for the full year 2011 decreased $42.6 million to $54.9 million. This improvement was due primarily to derivative gains and revenue increases offset by higher depreciation expense.

We ended 2011 with $10 million of unrestricted cash. $8 million remain in our COFACE facility and $46 million in our contingent equity account. During the fourth, we withdrew a total of $14 million from this account to pay certain operating expenses, inventory purchases, and interest obligations. We expect to continue to draw from this account throughout 2012. As disclosed in our release, we successfully completed an amendment to our COFACE facility, which, among other things, defers our first repayment date to 2013. We believe this amendment demonstrates the willingness of our banking group to align the repayment schedule and covenant levels with the updated launch schedule and concurrent service improvements. With no principal payments in 2012, we expect to be able to enter a period of duplex revenue recovery prior to the beginning of the facility's amortization period.

As discussed previously, we continue to work toward securing longer-term financing 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. As disclose in our form 10K which will be filed with the SEC tomorrow, we believe that our cash on hand, the funds available in on our contingent equity accounts, cash flow from operations, and the remaining availability under our COFACE facility will be sufficient to meet our contractual and anticipated capital obligations in 2012 without additional financing.

Going forward, although we remain encouraged by our fourth quarter performance, management continues to focus on improving profitability and increasing revenue. Although the improvements in performance over the past quarter were due to increased SPOT and Simplex revenue combined with lower costs, we expect that the main future driver of cash flow will be the full restoration of our duplex service. I will now turn the call back over to Jay.

Thank you, Rebecca. As you just heard, we are very pleased with the positive adjusted EBITDA the Company generated last quarter. It has been a long time since we've reported such a result. We are encouraged with our financial progress and believe this past quarter is an inflection point for Globalstar and demonstrates a turnaround in our business. We accomplished this by restructuring our operations when it makes sense to do so. As an example, in late 2011, we undertook an initiative to streamline the manufacturing process to better align it with current product strategies. We signed agreements with new third-party contract manufacturers for our SPOT, SPOT Connect, and Simplex based asset tracking products. Changing manufacturers is never an easy task, and in this case, our supply chain was negatively affected in the first quarter. However, we expect this initiative to result in reduced costs and other efficiencies and to ensure a long-term, stabilized supply chain for our Simplex and consumer product line.

With increased discipline in the areas of sales, marketing, and product development, plus a new constellation offering improved coverage, and a return to the industry's highest quality service for our customers, we are laying a strong foundation for this business. Throughout 2011, Globalstar made the necessary investments and operational improvements to best realize the significant opportunities that lay ahead. We are focused on increasing our revenue and adjusted EBITDA in 2012, which we expect will be manifest more as the year progresses.

At the most fundamental level, last year we launched 12 new satellites, which means we are now only one launch away from restoring full coverage. Many of these new satellites have reached their final orbital altitude and are in service providing our subscriber base with enhanced service quality. We are happy to announce that duplex and voice service levels have more than doubled since the beginning of 2011. With three launches now complete, we expect to achieve an 80% to 90% call connection rate for customers located in our key markets once only the already launched satellites are in service. With Simplex services like SPOT, we are at full coverage now. Our customers have responded to improved coverage by increasing their usage of the network, and they are once again showing interest in purchasing new equipment in higher ARPU air time plans.

Our customers can expect continued improvement in their service quality as we place additional satellites into orbit throughout the balance of 2012. We plan our fourth launch in the second half of this year. That launch will complete the constellation and return us to the service level our customers enjoyed just a few years ago. We will update you with the actual timing of the fourth launch as that campaign progresses and a launch date is finalized.

And as an update, the momentum wheel issue we have previously discussed has had no significant impact on our customers, and none of the satellites launched in late December has shown any indication of being affected. We are working diligently with our satellite manufacturer and others to develop a software patch to correct the problem, and we are encouraged that recently completed computer simulations in both California and France were successful. There is additional development work necessary over the coming months, but we expect to implement the fix sometime in the next six months. We are using the same basic solution as has been successfully implemented on other satellite systems previously. Once installed, we expect all of the satellites to successfully complete their 15-year missions.

I know many of you are interested in the status of the commercial arbitration with Thales regarding our rights to order additional satellites under our contract. We participated in an evidentiary hearing in New York in late January and are in the midst of filing our post hearing briefs now. We expect the arbitration panel to render a decision in the near future.

Last week, Globalstar announced important and positive changes to the COFACE supported loan agreement we have with our five French banks. Following the efforts of both COFACE and the bank group, the agreement was modified to take into account the delayed delivery of our satellites. We are pleased with the amendment and would like to acknowledge and thank COFACE, members of the lending group, and all other parties involved for recognizing the need for this amendment while we complete the launch of the new constellation.

As always, a brief updated regarding Globalstar's spectrum is in order. As most of you are aware, the FCC's national broadband plan has encouraged with use of additional spectrum, including Globalstar's, to deliver wireless terrestrial broadband services. Recently, the FCC announced a notice of proposed rule making regarding the use of the 2 GHz spectrum, previously held by ICO and TerreStar, which is now being transferred to DISH Network. We support the FCC's decision to address these issues in the context of a rule making, and we intend to participate actively in the proceeding. Ultimately, we expect the FCC to provide MSS operators with additional flexibility to utilize our spectrum terrestrially to better serve their customers with new, innovative services and help solve the nation's impending spectrum shortfall.

In summary, 2011 was an exciting year for us. We completed the licensing and registration of our second-generation constellation permitting its operation throughout the Globalstar coverage area. In the fourth quarter, we reported positive adjusted EBITDA for the first time in four years. We substantially improved satellite coverage and service quality by launching 12 new satellites. We streamlined our operations and reduced costs. We modified our third-party manufacturing relationships for increased efficiency and reduced delivery times. And just last week we announced substantial and important modifications to our COFACE loan agreement.

As we move forward in 2012, we will continue to build on all of these accomplishments while working on numerous new and exciting opportunities such as the following. We are working with ADS-B Technologies on a global, next-generation, satellite-based air traffic control management system and are confident that Globalstar and ADS-B will provide the best solutions in leading the requirements for air traffic management organizations around the world. We are also providing low-cost, innovative solutions to the MSS market as part of Globalstar's corporate DNA. That same will DNA will drive our innovation in the MSS voice and duplex data markets. We are working on new products and technologies that we feel are nothing short of revolutionary, and we anticipate making important technology partnership announcements in the very near future.

As we complete the deployment of our new constellation, we are also experiencing an increased interest in establishing new gateways in under-served parts of the world. We have previously announced an agreement to restart the Globalstar gateway in Saudi Arabia, and we expect to enter into additional gateway agreements around the world that will further extend our footprint. In short, we are laying the product and business operations foundation necessary to grow our subscriber base with an increased concentration on driving revenue and profitability in 2012 and beyond. While some certainties remain, I firmly believe that Globalstar will return to the high EBITDA margin business that we enjoyed prior to 2007.

Thank you all for your time today, and I look forward to speaking with you again in about two months. Rebecca, Tony, and I are now available to answer your questions.

(Operator instructions). Our first question will come from the line of Jim McIlree with Dominick & Dominick. Please proceed.

Thank you. Good morning. When do you think it would be reasonable to expect a resumption in growth in duplex subscribers? And also, can you help me understand why the ARPU for duplex was so much lower Q4 versus Q3?

Sure Jim. Let me take the questions in that order. First, we expect to see recovery during the course of this year in duplex. Every time we add another satellite to the constellation, the service quality to the customer increases. And as it increases over a certain threshold, they become more excited about buying the service. We have what we believe is substantial, pent-up demand with people that already own Globalstar equipment, and as a result, expect to see that increase rather dramatically over the course of 2012. On the question of ARPU, I think I would like to toss that to Rebecca.

Hi Jim. Thanks for the question. Fourth quarter 2011 included a one-time revenue adjustment at one of our subs. That's kind of skewing that ARPU amount. I think a better representation of the trends that we are seeing in more normalized levels would be to look at the year-to-date amount, which also would show a decrease but a more moderate decrease. And I think a certain level of attrition among our subscriber base on the duplex side is expected, which, of course, is going to bring down your revenues. And also, just from a marketing perspective, over the past year or so, we have transitioned certain of our subscribers from the legacy, higher-cost, higher-ARPU plans to lower-cost plans.

But the biggest -- the biggest part of that $3 plus quarter-to-quarter decline in ARPU was the one-time revenue adjustment?

That's correct.

And then on the first question that I asked, as you bring the new satellites into the constellation, you said that will be the driver of better duplex results. Can you remind us how many of the launch satellites are currently active?

I sure can. In fact, I would like Tony to answer that question. And for the people listening, Tony is on the road today, so he joined us remotely. Tony, can you answer that one for Jim?

Yes. Good morning Jim. The answer to your question is, all of the satellites that have been launched are active. And we have them in various states of operations as we orbit rate them into their final satellite orbital plane.

When will they be -- when will all of them be operational?

The plan is to have all the satellites that have been launched into service, that is from Batch 3, as early as this month. We begin to bring those into service. And we plan to have all the satellites in service by later this summer.

Great. Thank you.

And our next question will come from the line of Bill Oppenheim with Oppenheimer. Please proceed.

I'm all set. The question's been answered. Thank you very much.

And our next question will come from the line of Brian Davidson with Stark investments. Please proceed.

Hi, can you hear me?

Yes we can.

This is actually Alex Sammarco for Brian. I have a couple of follow-up questions from the commentary. The first is, thank you very much for the liquidity update. I noticed that cash balance actually improved by about $4 million in the quarter. Can you just talk a little bit about what happened there, if that's a one-time working capital change on the balance sheet? And then second, Rebecca, to the extent that you foresee having enough cash and liquidity to make it through the end of 2012, can you talk a little bit -- you did a good job in going through the sources side. Can you talk about expected uses? Then I have a couple of follow-up questions.

Sure. To address your first question as it relates to our working capital, as you probably noticed, we did make two draws during the fourth quarter from our contingent equity account which totaled $14 million. So that would, of course, increase our cash balance. In terms of capital obligations during 2012, currently, the contract states that we owe milestone payments of $84 million. It is really kind of roughly 50% is space, 50% is ground. And then we have $20 million of interest payments due during 2012.

Alex, a quick note, too, on those numbers. When you look at the ground portion of the CapEx this year, as you know, the ground portion is something we have been working with Ericsson and Hughes on for some time. And we'll continue to work with them in order to time the development of the second generation ground to our cash ability to pay. And they have been working with us in order to adjust that schedule, to recognize the delays that we've seen in the satellites themselves. So we would not expect to spend all of that in this year at all.

Okay. And as I understand it, and noticing from how the Hughes and Ericsson relationships have developed over the past 24 months, as you have experienced satellite delays, it seems like they have been pretty willing to work with you. Can you just comment on that? And maybe, do you have extensions in place or discussions underway?

We do have certain extensions in place, and we always have discussions with them. Both are tremendously valuable long-term suppliers to Globalstar. And the nature of the relationship goes way beyond the first deliverables. So there is a considerable incentive on the part of both Globalstar and these two companies in order to continue to work together. They are large, large companies, and the value of the work that we are doing with them is relatively small compared to a lot of what they do, and they've known us for a very long time. So they keep working with us, and we find ways to massage the schedule to accommodate the revenue recovery that we see once the satellites are up and ARPU and duplex revenue picks up again for us.

Great. I appreciate that update. Jay, I had another question. I think in your scripted remarks you mentioned negative developments in the supply chain. Could you just expand on that a little bit?

Sure. We were, in the second half of 2011, reviewing who was going to build some of our consumer products, and we made a change during that period of time. And when you make a change like that, there are inevitably issues of transition. And for us, we wanted to make absolutely certain that the quality of the product that we were delivering was unassailable. So we took our time with the new vendors, making certain that everything imaginable in those products was fully and completely vetted on the ground here. And so the effect of that was that deliveries that we would have expected for SPOT were somewhat delayed in the first quarter, and deliveries for our other Simplex products were delayed into the first quarter. And so it's just -- it's a function of running your inventory as close to zero as you can. In this case we ran it below that, and we had backlog, which we are feeling right now.

Okay. Yes, great. Because what I noticed is it implied a real uptick in the fourth quarter of SPOT and Simplex. So just wanted to close that loop. If I may, if I've got time, I just wanted to ask one quick question on spectrum.

Okay.

I was wondering if, assuming that there is an eventual relaxation of the MSS regulations and that ultimately, the notice of proposed rule making with regard to the S-band for dish results in greater terrestrial flexibility there, can you talk a little bit -- or maybe can someone talk a little bit about Globalstar's pairing? There's a lot of speculation around there that the pairing of the Big LEO band being asymmetrical with just over 7 MHz for uplink and over 11 MHz for downlink might cause some issues. So is that appropriate for, for example, time division, LTE, or emerging technologies for LTE Advanced? And then, kind of related to that, Iridium, and I don't need for you to comment on Iridium specifically, but they have a much narrower spectrum allocation. Is it anticipated or do you think it is reasonable to perceive that Globalstar can -- well, that the MSS business and a monetization of excess spectrum are not mutually exclusive? In other words, perhaps having a 4G network strategy living alongside an MSS narrow band strategy?

I can answer that for you, I think, Alex. Let me just sort of wander through the subject a couple of different ways. First of all, in terms of coexistence, there are clearly ways to coexist, and we are evaluating those currently. I have no concerns that we will be able to find something that is acceptable to our existing and future MSS customers, as well as for a terrestrial strategy. Secondly, on the issue of whether the spectrum is satisfactory for LTE versus LTE Advanced, I don't think we have a view on that at this point. A little bit of that depends upon -- or maybe a lot of it depends upon the party that we partner with for the utilization of that spectrum. Lastly, the asymmetrical nature of the spectrum actually mirrors what's going on with data consumption right now, anyway.

As you can imagine, most of the use in the data network is downstream. In other words, you're receiving a Netflix movie, and what you are doing upstream is sending an e-mail or surfing the web. So the asymmetrical nature of the spectrum is not proving to be an inhibition in any of the conversations that Globalstar is having. And lastly, in terms of the NPRM itself with DISH, we are going to support that. We are going to be a participant in it, and we will see what comes out of it. We are optimistic that the type of relaxation of the gating items is exactly going to be the result of that process. And that would presumably benefit us as well, even if our process necessarily goes down a slightly different track and perhaps at a slightly different time than their NPRM.

That's great. Thanks very much for the update, Jay.

Any time.

(Operator instructions) Our next question will come from the line of Gus Cardenas with Satellite Communications Services. Please proceed.

Thank you, and good morning. This call -- this question may be directed at Tony maybe. It has to do with the launch -- of that fourth satellite, fourth launch if you have it. Is that a considered delay or on schedule? Or is it caused by the issues at over at your Kazakhstan launch pad facility, or is it the satellites not being delivered yet to you for them to be launched? And secondly, I have noticed there's some issues with SPOT allergies in South America. If you could address those for me please.

Thank you, Gus for the question. First of all, launching satellite is always a complex plan or requirement of matching your assets to what you want to launch. First and foremost, Soyuz has a number of launches where they are going to be leaving both Baikonur and [Caru] later this year, something in excess of 14 launches. Globalstar is currently working with both CAWAS and with (inaudible) to select the best window for the launch, which, as we've described, will be in the second half of this year. And specifically, the question on South America, I assume that you are talking about some of the results from the solar flares recently. From our perspective, we have had no issues that have interrupted our service based upon activities over the south Atlantic or caused by the solar flares.

Okay.

Ladies and gentlemen, at this time we have no further questions in queue. I would like to turn the call back over to Dean Hirasawa for any closing remarks.

Thank you, operator. With that, we'll bring the conference call to an end. Thank you again for joining us. And please be reminded that later today, an audio recording of the conference call will become available via telephone dial in and webcast recording and a copy of the presentation will also be made available on the Globalstar website. Thank you, and good morning.