Globalstar Inc (GSAT) 2012 Q4 法說會逐字稿

Welcome to the fourth-quarter 2012 Globalstar, Incorporated, earnings conference call. My name is Ellen and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Carolyn Capaccio of LHA. Ms. Capaccio, you may begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us for today's conference call to discuss Globalstar's three-month and annual results for the period ended December 31, 2012. 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 annual report on Form 10-K for the period ended December 31, 2012, which is anticipated to be filed tomorrow.

The press release, this conference call, and the associated slide presentation, which is available on the Investor Relations page of Globalstar's website, include 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 on this call is accurate only as of today, Thursday, March 14, 2013. Today's press release contains certain financial information, is available on the Company's website at www.Globalstar.com. Later today, an audio recording of this conference call will also be available via telephone dial-in and a webcast recording, along with a copy of the slide presentation that will also be made available on the Company website.

Today's call is being presented by Mr. Jay Monroe, Chairman and Chief Executive Officer, and Rebecca Clary, Chief Accounting Officer and Corporate Controller. Joining Jay and Rebecca for the question-and-answer session will be Tony Navarra, president of global operations, and Jim Taylor, Senior Director of Finance. Now it is my pleasure to turn the call over to Jay Monroe. Jay?

Good afternoon. We made tremendous progress throughout 2012, and we have started off 2013 with the final launch of second-generation satellites. Globalstar is the first MSS provider to successfully launch a second-generation constellation of LEO satellites, placing us years ahead of our competition.

Later in the call I will provide you with more information regarding last year's accomplishments and what we have in store for 2013. But first I will turn the call over to Rebecca Clary, our recently named Chief Accounting Officer, who will provide you with a complete overview of our fourth-quarter and full-year financial results. Rebecca?

Thank you, Jay, and good afternoon, everyone. As shown on slide 3, Globalstar reported adjusted EBITDA of $2.5 million for the three months ended December 31, 2012, compared to adjusted EBITDA of $1.6 million for the fourth-quarter 2011, an increase of $900,000 or approximately 50%.

The improvement in adjusted EBITDA resulted from an increase in revenue of $1.7 million, offset by an increase in operating expenses of $0.8 million, excluding EBITDA adjustments. Adjusted EBITDA for the full-year 2012 was $9.8 million, an improvement of $16.2 million over 2011.

The Company reported a net loss of $19 million for the three months ended December 31, 2012, compared to a net loss of $33.7 million for the fourth quarter of 2011. The change was due primarily to the impact of non-cash derivative gains in the fourth quarter of 2012 compared to losses in the fourth quarter of '11, offset by an increase in depreciation expense, as the Company placed additional satellites into service throughout 2012. When comparing the full-year 2011 to the full-year 2012, the Company's net loss increased by $57.3 million to $112.2 million due primarily to non-cash items, including a reduction in derivative gains and an increase in depreciation expense, as well as an accrual for a contract termination charge and an increase in interest expense.

Revenue was $19.1 million for the fourth quarter of 2012, compared to $17.4 million for the fourth quarter of 2011, an increase of approximately $1.7 million or 10%. This increase was attributable primarily to growth in service revenue associated with the expansion of our total subscriber base and a significant improvement in ARPU for our Duplex subscribers. For the full-year 2012, and excluding the revenue recognized from the termination of our Open Range agreement in 2011, total revenue increased 8% or $5.5 million to $76.3 million dollars, from $70.8 million during 2011.

Service revenue grew 13% to $15.3 million for the fourth quarter of 2012, from $13.6 million for the fourth quarter of 2011. This improvement was driven by a $1.1 million or 20% increase in SPOT service revenue, coupled with a $600,000 or 14% increase in Duplex service revenue. Duplex service revenue increased due primarily to conversions of subscribers to plans with higher rates, reflecting the improved service levels from our constellation.

Rate conversions will continue to be an area of focus throughout 2013. However, our principal focus will be adding new subscribers who will be on higher monthly rate plans than our current ARPU levels.

This strategy has started to take effect, as Duplex ARPU improved from an average of approximately $16 in the first half of 2012 to almost $19 in the second half of the year. Furthermore, total Duplex usage on the network in the fourth quarter of 2012 increased 17% versus the prior year's quarter. We view this as a leading indicator of future revenue growth from our Duplex business.

Subscriber equipment sales were $3.7 million for the fourth quarter of 2012, compared to $3.8 million for the fourth quarter of 2011. Although Duplex equipment sales nearly doubled and Simplex sales increased 12%, there was an offsetting decrease in SPOT sales as compared to the fourth quarter of 2011. We have continued to see comparative declines in SPOT equipment sales from 2011, due to the timing of demand for certain SPOT products released in the prior year.

The increase in operating expenses for the quarter, excluding EBITDA adjustments, was due primarily to expenditures to support our enhanced sales and marketing efforts and certain regulatory expenses related to the FCC petition process.

Looking forward to 2013, we expect that our ability to leverage our restored Duplex service, as well as marketing strategies around new and existing products, will result in revenue growth particularly in the second half of the year. Furthermore, we expect to continue to control operating expenses, even as we judiciously invest in sales and marketing programs as well as new products, which Jay will comment on later.

The following provides an update of the Company's current liquidity position. During the fourth quarter, the Company drew a total of $22.8 million from our contingent equity account, leaving a remaining balance of $1.1 million as of December 31, 2012.

Additionally, in late December we entered into an agreement with Terrapin Opportunity Fund, structured as an equity line whereby we can draw up to $30 million over a two-year period, subject to certain conditions. No draws have been made to date. We ended the year with $11.8 million total cash on hand.

On December 31, 2012, the Company also held $46.8 million in our debt service reserve account. Although the use of this account is restricted primarily to pay certain debt-related obligations, the required balance in this account fluctuates over time based on future principal and interest commitments. For example, the required balance was reduced in the fourth quarter, per the terms of our facility agreement, which allowed us to draw $8.9 million from this account in January 2013 to fund certain fourth launch-related costs.

With respect to debt-related obligations and covenants, we are currently seeking to amend the Coface facility agreement to properly align future commitments with the Company's realized launch schedule and business plan. Among other items, we are seeking to adjust the timing of our debt obligation and to revise financial and nonfinancial covenants to appropriate levels.

As previously announced we are also currently negotiating with the holders of our 5.75% notes to restructure the terms of these notes prior to the April 1, 2013, put date. In addition to these debt obligations, we also have contractual capital obligations owed to our launch services provider and certain other major contractors. As has been the case over the past several quarters, our current sources of liquidity are not sufficient to meet these obligations without additional financing or amendments to these contracts.

We look forward to providing further updates on our capital raising and contract negotiation process as they are available. I will now turn the call back over to Jay.

Thanks, Rebecca. On February 6, we successfully completed our fourth launch campaign with a technically perfect launch from the Cosmodrome in Baikonur, Kazakhstan. All previously launched satellites are in commercial service, and the final satellites from this fourth launch have successfully completed initial testing. We placed two of these recently launched satellites into commercial service at the beginning of March, and we expect to place the remaining satellites from the fourth launch in service sequentially, as planned, over the next few months.

This was our 12th successful launch on the Soyuz vehicle with our long-standing partner, Arianespace, and their affiliate, Starsem. All 12 have been perfect.

As our coverage and quality improves with each new satellite, our Duplex minutes of use and ARPU are both on the rebound. This will be a very exciting year.

I would like to shift gears for just a moment and update you on our progress before the Federal Communications Commission. As you know, we filed a petition for terrestrial authority with the FCC on November 13, and the Commission quickly placed it out for public notice. The FCC received comments in January, and the comment cycle is now officially closed.

While certain interested parties file initial comments to our proposal, we actively provided additional information, including through a webinar entitled Globalstar's New Wi-Fi Super Highway. As a result of these proactive steps to clarify our proposal, most of their questions were answered, since few reply comments were subsequently filed with the FCC.

Any remaining concerns regarding our near-term plans to provide terrestrial service, including the innovative Terrestrial Low Power Service, which some refer to as Channel 14 Wi-Fi or TLPS, are quite manageable and will be handled in the Rulemaking. We expect to hear from the FCC shortly regarding how it plans to proceed with our petition, and we continue to believe that they will issue a Notice of Proposed Rulemaking in the near future and complete the proceeding by year-end.

As we have discussed before, Globalstar's TLPS offering would dramatically expand the nation's spectral capacity and relieve existing Wi-Fi congestion, what the Chairman of the FCC calls the Wi-Fi traffic jam. This can happen immediately by using ubiquitous, existing Wi-Fi devices and infrastructure on our proposed TLPS network. We expect this service to be managed over a carrier-grade network of access points in a controlled fashion, to maximize the throughput capacity of the service and so as not to interfere with our satellite operations or any other wireless services in adjacent bands.

Although we are not prepared to provide many details at this time, we are in discussions with potential partners regarding this opportunity. These discussions are leading to field trials in various areas of the country. Globalstar and its technology partner, Jarvinian, have filed for experimental licenses with the FCC to test TLPS with these companies in geographic areas.

Just to be clear, we are first, foremost, and always an MSS company and our satellite service offerings will grow dramatically with our new constellations. That said, we believe the FCC wants everyone to optimize the use of all spectrum assets and for us to use our spectrum as intensively as possible terrestrially, as we fully utilize all of our channels for our MSS offerings now. We fully expect terrestrial services, if approved, to augment our revenue and income streams, driving additional returns for investors and support our continued provision of critical Mobile Satellite Services.

With the launch campaign successfully completed, our corporate focus is now squarely on sales and marketing. Late last year we announced the appointment of Frank Bell to hear our Global Sales and Marketing efforts. Frank and his team have developed a targeted go-to-market plan which we are very excited about implementing this year and beyond.

The users of voice services via satellite have always acknowledged that Globalstar offers the finest voice quality. Our voice quality isn't just good or acceptable -- it is simply outstanding. More on that point at the end of this presentation.

In addition, we have led the industry in establishing innovative pricing plans for both equipment and service. And given this winning combination of service, quality, and price, who would ever purchase competitive products when our service often costs as little as 25% of competitive offerings, our equipment cost is in some cases less than 50% of the competition's, and our voice quality is vastly superior? Expect announcements of new products for the voice and Duplex data market during 2013.

Our SPOT and Simplex business is completely different from Duplex. Here we expect to win in the marketplace by leveraging our 10,000 points of retail distribution and our loyal customer base and by introducing four exciting new products over the next 12 months or so. Shortly, we plan to introduce the new SPOT Gen 3 personal tracking device, which will be smaller and more feature-rich than its two predecessors, with 2 times the battery life.

We expect two additional SPOT derivative products addressing entirely different tracking applications and use cases, both of which are targeted at the consumer retail marketplace. These are to be introduced within the next year. One of these products in the near-term pipeline is a new consumer tracking device that will broaden the market for inexpensive tracking of anything, anywhere, anytime.

These Simplex and SPOT products, plus additional Duplex products, will use the retail distribution channel that we have painstakingly built over the past five years and a customer base of over 500,000 to substantially increase our consumer retail revenue going forward. Much of this increase we expect to occur beginning in the third and fourth quarters of this year.

With over 250,000 SPOT units sold, our subscribers are now using SPOT to initiate, on average, more than one rescue every single day somewhere around the world. With over 2,200 rescues to our credit, SPOT is part of our corporate DNA.

On the commercial Simplex and M2M front, we are introducing the STX3 during the second quarter. It is smaller, lighter, less expensive, and more power efficient than the STX2. We expect the entire STX family to remain our core M2M solution for this fast-growing segment of the MSS market.

The STX3 will be much easier to integrate by VARs and VAMs into their final products. Given the small size, low power requirement, and ease of integration, we expect a large growth opportunity from marrying this very small and inexpensive device to hybrid cellular satellite products for a wide range of commercial and consumer tracking applications.

Before we go to questions, for any of you out there -- our customers, our investors, our channel partners, or others -- that may still be wondering if Globalstar is really back or whether we will really be successful in the marketplace, I have one last announcement this afternoon. This conference call has been taking place over the new Globalstar satellite network.

That's right. In what is probably unprecedented, everyone is experiencing firsthand the incredible clarity and quality of this billion-dollar investment we made over the past five years in this second-generation network. We encourage you all to compare us to any competitive offering.

With that, we now must transition to our rather inferior landline service so we can resume this call on speakerphone and answer any the questions that you may have. Give us 30 seconds to transition.

One last thing. Welcome to the new Globalstar. Operator, please queue up the first questions.

(Operator Instructions) Marco Rodriguez, Stonegate Securities.

Good afternoon, guys. Thank you for taking my questions. Really quick, just in regard to liquidity here and the convertible notes that are due here, and given your recent equity line that you also have available, I was wondering if you can probably give us a sense, also with the negotiations, what's your level of comfort?

Sure. Marco, in terms of the equity line, that is more or less restricted. It funds into the Company over a long period of time. It is essentially not available to satisfy any amount that is put come April 1.

In terms of our comfort level on the 5.75% process, we have talked about this publicly; but of course, there is $72 million that is able to be put on April 1, just a couple weeks from now. We are in negotiations with the holders of these bonds to execute a multiyear extension of the April 1 put date.

We don't have anything to publicly announce yet. We are confident that we can get something announced within the next couple of weeks. Again, can't share any specifics on those confidential negotiations, but are expecting to be able to announce something successful in the coming weeks.

Great. Can you give us a sense? How long have you been in negotiations with them?

This goes back months and months. I think it was first publicly announced in late August or early September. It is a complicated process, of course, and that's coming down to the 11th hour, but I think we will have something positive to announce in just a couple weeks.

Okay, great. Then switching gears here to your Duplex services, on the call you mentioned an adjusted revenue growth number, excluding the Open Range revenues in '11, at about 8% revenue growth. And obviously you have an updated Duplex service.

So how are you guys thinking as far as revenue growth? Are you thinking somewhere in the teens?

Well, you know we don't give specific guidance in terms of our revenue growth. But we do expect to see growth in 2013, particularly in the second half, just as we complete the deployment of our constellation and are able to execute from a sales and marketing perspective on our go-to-market strategy through the new product introductions that Jay referred to.

All of that, the timing of that, will really drive subscriber growth. And as those subscribers are coming on, they are coming on at our current higher price rate plan, so that is going to really ramp up Duplex service revenue.

Okay, that's fair. So in terms of that revenue growth, are you going to -- or, are you rather modeling or assuming more growth coming from an increasing ARPU or from the subscriber count? Give us some sort of a sense there.

Really from the -- if you look at our current rate plan, the lowest rate plan that we are offering is in the $25 range. We are currently at ARPU levels between $18 and $19. So that will give you a sense there.

Then on the subscriber front, we are really just positioning ourselves to be able to penetrate the market once our constellation is fully deployed and, as I mentioned, our go-to-market strategy is executed. So we will see revenue from both sources.

Okay, perfect. Then maybe you can provide a little more color in terms of the go-to-market strategy that you guys are going to start to implement here. Is that going to be coming out slowly here, or are you ramping it up very fast? Any kind of color there you can provide?

Marco, qualitatively we are investing substantially more this year than last year in both the marketing of the products, the personnel in the sales and marketing department, marketing and sales support, and of course in Frank himself in order to give him the resources he requires in order to be successful in this coming-out year for Globalstar. So there will be a lot more going on that is visible.

What is most visible, of course, is what happens in retail channels, in the consumer market channel. But that which is going on with our long-term vertical market, resellers, dealers, and agents, happens a little bit behind the scenes but is a powerful propellant to what we do in 2013.

Got it. Then a last quick question here, in regard to the marketing and G&A spend here in Q4. It was down sequentially. Was there anything driving that? Or is this a new base that we should be modeling off of?

It was down from third quarter to fourth quarter. Is that what you're saying?

Yes.

Yes, so in terms of looking forward to 2013 from an operating expense perspective, we do intend to make certain investments to support our sales and marketing efforts. So I don't know if it is completely appropriate to use fourth quarter as a run rate for 2013.

We expect to keep our operating expenses flat, other than those sales and marketing investments. So just keep that in mind for your modeling.

Okay. So were there any one-time items that maybe weren't spent in Q4 there?

No, actually third quarter was a little bit inflated because we had -- look at the EBITDA adjustments. We had some write-off of deferred financing costs and some other expenses that probably should be taken out of that number to normalize it a bit.

Got it. All right. Thanks a lot, guys.

Jim McIlree, Dominick & Dominick.

Thank you and good evening. Can you talk about the capital needs in 2013? I am not talking about the balance sheet issues, but satellite costs and ground infrastructure costs that are due or planned in 2013?

Sure, sure, Jim. Let's start off with the liquidity that we ended 2012 with. Total cash balance at December was just about $12 million.

We had $1.1 million remaining in the contingent equity account; $30 million available under the Terrapin equity line, which of course gets tapped over time; about $47 million in the debt service reserve account. That is of course restricted as well; but, as Rebecca mentioned, we were able to draw a portion of that in Q1. And about $700,000 remaining payable to Thales and the Coface facility.

So said total liquidity at the end of December was a little over $90 million. However, of course, the Terrapin funds and the DSRA are very much restricted.

In terms of what we have done so far in Q1, most of the capital needs have been directed towards satisfying the launch four related costs, including $8.6 million to Arianespace and a little over $9 million to satisfy the launch insurance; so just about $18 million.

Going forward, there is total ground commitments in 2013 of about $30 million; on top of, as currently structured, $16.7 million of debt obligations in June and another approximately $17.5 million in December. Finally, there is ongoing cash interest associated with the Coface facility of about $17 million, on top of about $4 million in the 5.75% notes cash interest.

As we have talked extensively, we are looking to significantly amend the Coface facility such that the start of the repayment period will be significantly after June of 2013. We have not come to an agreement yet, but certainly hope to prior to the June repayment date. In addition to that, we have also made extensive amendments to our other large capital obligations over the last couple of quarters and years, and expect to continue to do so in order to balance the obligations with the liquidity that we have on hand.

So in terms of the actual financing needs it is variable. It is dependent upon the success of the debt restructuring, both the 5.75% notes, the Coface facility, and our other obligations. So I can't give you a specific number, but we are in a process right now to seek the proper financing to satisfy our obligations and come to a fully funded business plan.

That financing, as you can imagine, is contingent on successfully completing a number of milestones including getting past the fourth launch, which of course was successful, and also successfully renegotiating the 5.75% notes. So I think as we are successfully passing these milestones, the liquidity picture will be much clearer.

First things first. We need to figure out and properly amend the 5.75% notes in the next couple of weeks, and hope to provide a little bit more specific guidance on how much we are going to raise and what the liquidity demands are in the Q1 conference call.

Okay. I hear you. Thank you, Tim. As far as the Phase 3 satellites go, spending on that will be dependent on, like you said, how everything else shakes out.

That's correct.

Okay, great. That's very helpful. Thank you. Rebecca, you talked about equipment revenue, down year-over-year in the SPOT business, and you attributed that to some reason. But I didn't just didn't quite understand what you were getting at. Could you try that one more time for me, please?

Sure. One of our SPOT products was released in early 2011, I believe in March. So it just resulted in unusually high demand in that period. So when you look at the comparable period, you just see a decrease from '11 to '12.

So when we look into 2013, I think Jay talked about new products coming in the SPOT business. Does that have -- does that potentially, assuming success in that project, result in the same kind of profile that you saw in 2011, where you get a big step in a quarter?

That is what we definitely expect.

Okay, great. Then on that same issue, it sounds like some of these SPOT products might have a lower ARPU than existing SPOT products. And in order -- it sounds also like some of these SPOT products might have a lower equipment price than existing SPOT products. Did I hear that correctly?

Some of our -- so SPOT ARPU, are different products basically have the same basic rate plan; but subscribers can opt to add different tracking components to their rate plans. So ARPU is really a function of that from a SPOT perspective.

For the equipment pricing, we did adjust the price of our SPOT 2 just as we gear up for release of SPOT 3, and trying to deplete the inventory out there related to that product. Does that answer your question?

I was referring to a comment Jay made where I think he said it is going to broaden the market for tracking of anything. When I heard that, I just assumed that meant that you were going to come out with a much lower price, much lower ARPU device, where you could stick it on anything. That is what I heard, or that is what I implied when that comment was made.

Jim, there is definitely the possibility for us to bring out products which cost less and would receive potentially a lower ARPU. We haven't priced the products yet for the marketplace, and SPOT Gen 3 will not fit that profile.

But some of the future tracking products, which are intended to broaden the market, could be products which we would price differently. And we would have pricing plans that were different.

At this moment I can't say what that would do to ARPU, but the only reason we would do it is because we believe that we would be able to sell quantums more than we are selling right now in regular SPOT products. So we would make that logical trade-off at that point.

But the underlying technology that we use for these products is less expensive now for us, because we have taken what used to be a board and we have turned it into a single chip. And as we take cost out of it we do retain a lot more flexibility.

Okay, great. I understand. Then lastly on the Duplex ARPUs for this year, by year-end do you have any customers on the old rate plans? Or has everybody migrated?

No, we are actually just initiating that conversion project. So we have got a substantial amount of customers left to contact and to convert.

Okay. So that transition will take place --

Over the next several months.

-- over the next couple of years?

Months. We slice and dice the subscriber base and we -- it is a strategic process. So in 2012 we targeted a specific pool of customers on a specific rate plan and bumped them up to the then-$40 a month unlimited plan. We were successful in doing that.

And Phase 2 of that project will be targeting a group of customers who, on purely usage-based plans -- so old usage-based plans -- who aren't heavy users. We will reach out to those customers, reengage them, get them back on the network. And then we will go from there.

So it is a process, and it is in its infancy.

Okay, will let me ask it a different way then. So for the ARPUs that go throughout 2013, is it steady march up and to the right? Or is it you are flat, and then you have a step function up, and you are flat, and then you have a step function up?

You can only increase so with each subscriber that is being added to the network they are coming on at higher rate plans than our current ARPU levels. So you are going to see a slant and to the right; but then you are going to see more of a hockey stick the second half of 2013, because we are just going to be bringing subscribers on at higher -- just the pure number of subscribers will be higher.

Right. Thank you for that answer. You made it much clearer than my poorly worded question was (multiple speakers). So thank you so much. All right. Thanks a lot. Good luck.

We have no further questions at this time. I will turn it back to Mr. Monroe for any closing remarks.

If there are no other questions I think we will sign off here in a moment. Thank you all for listening, and I hope that the landline quality was satisfactory compared to the quality of the satellite service which was, obviously, better. Look forward to talking to everybody again in another 60 or 90 days. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the fourth-quarter 2012 Globalstar, Incorporated, earnings conference call. Thank you for participating. You may now disconnect.