Globalstar Inc (GSAT) 2013 Q2 法說會逐字稿

Welcome to the Q2 2013 Globalstar Incorporated earnings conference call. My name is Adrian, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Carolyn Capaccio, LHA. Carolyn, 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 results for the period ended June 30, 2013.

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 recent press releases and in Globalstar's SEC filings, including its annual report on form 10-K and quarterly reports on form 10-Q. 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 in this call is accurate only as of today, Tuesday, August 13, 2013.

The second quarter 2013 press release that was issued this afternoon, which contains certain financial information, is available on the Company 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 will also be made available on the Company website. Today's call is presented by Mr. Jay Monroe, Chairman and CEO; 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 Tim Taylor, Vice President of Finance. Now it's my pleasure to turn the call over to Jay Monroe.

Good afternoon everyone, and thank you for joining us. In Q2 and in the weeks following the close of the quarter, Globalstar made solid operational and balance sheet-related progress. We continue to reestablish our second-generation network and successfully restructured our senior and subordinated debt. In addition, to facilitate these critical transactions, we also announced an $85 million multi year Thermo equity commitment that demonstrates Thermo's continued belief in the success of Globalstar, its underlying investment thesis, and its near-term opportunities. The progress made during and after the quarter provides Globalstar the runway to capitalize on these opportunities. To date, our service level is restored, resulting in a doubling of new Duplex voice and data subscribers in the quarter, a 41% increase in minutes of use, and a significant ARPU pickup. The Company has materially improved its debt structure, which, entering the quarter, created a significant overhang on its liquidity. And we are now well positioned in the ongoing process with the FCC as we seek terrestrial authority for our spectrum. Before I provide a complete update, I will turn the call to Rebecca Clary to summarize the Q2 financial performance. Rebecca.

Thank you, Jay, and good afternoon, everyone. As shown on slide 3, Globalstar reported adjusted EBITDA of $2.9 million for the three months ended June 30, 2013, which is consistent with the second quarter of 2012. A less than 1% decrease in total revenue was offset by a 1% decrease in total operating expenses, excluding EBITDA adjustments. Net loss in the second quarter of 2013 increased from $27.5 million to $126.3 million. This increase was driven by noncash items, including a $47 million loss on the extinguishment of debt in connection with the refinancing of the 5.75% notes announced in May as well as a $50 million fluctuation in derivative valuation adjustment from a gain in the second quarter of 2012 to a loss in the second quarter of 2013. These items were largely driven by the value of the conversion option and the 8% notes issued in May, as well as similar derivative features in our other existing subordinated debt instruments. These values are impacted by various assumptions, including the Company's stock price volatility, and estimates of the price of future equity issuances.

Total revenue was $19.8 million in the second quarter of 2013, compared to $20 million in the second quarter of 2012. Service revenue increased $1.2 million to $15.4 million during the second quarter of 2013, while equipment revenue decreased $1.4 million to $4.4 million over the same period. Total revenue from our Duplex business improved significantly during the quarter, driven by increasing phone sales and activations as well as continued conversions of our subscriber base to higher rate plans. While service revenue from all of our core lines of business improved quarter over quarter from 2012, almost 70% of the increase was driven by our Duplex business. The increase in Duplex service revenue resulted from a 27% increase in ARPU, which grew from $17 in the second quarter of 2012, to over $21 in the second quarter of 2013. The continued improvement in coverage has allowed to us regain our subscriber base more effectively, as well as to offer higher rate plans than were in place during 2012 and which are commensurate with this improved service level.

The increases in SPOT and Simplex service revenue were driven by growth in our subscriber base due to the volume of equipment sales during the previous 12 months. Subscriber equipment sales were $4.4 million for the second quarter of 2013 compared to $5.8 million for the second quarter of 2012. Duplex equipment sales increased $1.2 million, or nearly 200%, while SPOT and Simplex sales decreased by $0.8 million and $1.6 million respectively, as compared to the second quarter of 2012. As we discussed this time last year, SPOT and Simplex equipment revenue during the second quarter of 2012 was elevated due to the several large sales that did not recur in 2013, including the sale of 6,000 SPOT units to the United States Forest Service.

Duplex equipment sales were enhanced greatly by the successful launch of the SPOT Global Phone in May 2013, while SPOT equipment sales, which decreased 46% from the second quarter of 2012, were negatively impacted by the delayed launch of the SPOT Gen3 product. In addition to not recognizing the revenue during the quarter that the product would have otherwise generated, the Company experienced slowed sales in the consumer market channel of our existing SPOT product in anticipation of the launch of SPOT Gen3. We expect equipment sales to rebound with the launch of SPOT Gen3 and other products over the coming months. Further, the return of our Duplex business is being seen clearly through the number of new and returning subscribers that are being added to our network and using our system once again, reinforcing our confidence in improving financial results over the coming quarters.

And now a few comments on liquidity. We ended the second quarter with an unrestricted cash balance of $6.2 million. The amounts available in the contingent equity and debt service accounts totaled $1.3 million, while the remaining amount in our COFACE debt facility was $0.7 million. At the closing of the amended and restated COFACE facility, these amounts totaling $2 million will be funded directly to our launch services and satellite construction vendors to satisfy current amounts outstanding. Additionally, a total of $37.9 million is current held in our debt service reserve account. The total equity line with Terrapin remains undrawn. According to its terms, Globalstar can now draw up to $30 million over a 24-month period ending on December 31, 2014.

The total use of funds upon closing of the 5.75% notes exchange in May 2013, including amounts for principal reduction and interest, totaled $25 million. This amount was funded by Thermo, purchasing additional shares of the Company as part of its $85 million equity commitment and back stop. As discussed last quarter, the Company intends to seek additional third-party capital, which will reduce the Thermo commitment on a dollar for dollar basis. As of today, Thermo has invested $45 million of its commitments, which includes the $25 million at closing of the notes exchange, an additional $14 million to maintain the Company's minimum liquidity balance, and $6 million in preparation for close of the amended facility. In August, the Company received proceeds in the amount of $4.4 million relating to the termination of its 2008 share lending agreement. These proceeds reduced Thermo's remaining commitment to $35.6 million.

We have worked diligently to resolve the uncertainty surrounding our ability to fund our debts as they became due as well as our ability to comply with covenants in our debt agreements. With the closing of the notes exchange, and the anticipated closing of the amended facility, these uncertainties will be behind us. We look forward to now being able to focus on the execution of our business plan. I will now turn the call back over to Jay.

Thanks, Rebecca. Let's set the stage for where we are and how far we've come. After a period of more than six years focusing on the construction and launch of our new network, the Company produced impressive results in the second quarter in those areas that are important to growth in the coming quarters and years. With three satellites placed into service during the quarter, network availability has improved materially, which has not gone unnoticed by the marketplace. The Duplex metrics that we view as important drivers include usage, gross subscriber additions and ARPU. With only one satellite remaining to be placed in service, new subscribers are coming back to Globalstar to take advantage of our voice quality and competitive pricing.

Duplex usage is surging, with minutes of use increasing 41% over the 2012 period. Gross subscriber additions of 4,300 more than doubled in the quarter versus 2012, with large government and enterprise customers gaining confidence in our network's reliability. In the US, returning customers include FEMA, New York City Office of Emergency Management, NYPD, Disney, and FedEx. In Canada, returning customers include the Federal Government agencies such as Environmental Canada, Parks Canada, Health Canada, and the Royal Canadian Mounted Police. We are thrilled to welcome these customers back to Globalstar.

Moving to slide 5, on our last quarterly call in May, we described the principal terms of the consent agreement entered into with the French lenders concurrent with the 5.75% convertible note exchange. Throughout the summer, we have worked with our lenders to complete the amendment and restatement documents. These agreements were executed on July 31, and we expect to close the transaction in the coming days subject to satisfaction of all conditions precedent. The final agreements are generally consistent with the terms announced in May. However, the maturity date has been further extended to December 2022. The agreements postpone the first significant principal payment date from June 2013 to June 2016. Through December 2019, the new repayment schedule defers a total of $235.3 million.

The facility agreements financial covenants have now been realigned with the realized launch schedule, and all existing defaults under the facility will be waved. We appreciate the partnership of our French lending group and the work of all the parties involved in the completion of this complicated process. In connection with the amended facility and the close of the 5.75% note exchange as we announced in May, Thermo committed an equity investment and back stop totaling $85 million through December 2014. As Rebecca mentioned, $25 million was funded at the close of the exchange, and an incremental $20 million was invested post-close. Thermo's outstanding back stop through 2014 currently stands at $35.6 million, reflecting the Company's receipt of $4.4 million from a third party in August. The completion of this process will allow the Company to refocus on our growth plans as the runway is now established to capitalize on our future strategic and operational opportunities.

Let's move to slide 6 for an update on the FCC process. Both the FCC and the communications industry generally, recognize the nation's acute shortage of spectrum, especially spectrum suitable for Wi-Fi. Spectrum is a scarce resource, and the exponential growth in data traffic across the US is straining networks, driven by the prevalence of consumer smartphones and tablets combined with increasing demand for data intensive applications such as video. Last year alone, mobile data traffic in the country increased 70% and will lead to a gap in spectrum availability in the very near future. Wi-Fi, the protocol that actually carries roughly 80% of all wireless traffic, has led to a significant off-load opportunity for wireless carriers but is also facing acute performance issues. Because Wi-Fi is the most heavily used method of wireless broadband connectivity, consumers, particularly those in densely populated areas, will continue to experience reduced coverage and speed, and their dissatisfaction with this once great service will grow. Globalstar is uniquely positioned to offer an immediate solution to help relieve the industry's issues.

With respect to our petition for rule making submitted to the FCC, during the quarter we completed the requisite informational meetings and look forward to the commission initiating a formal rulemaking process in the near future. Although the FCC is considering other proposed solutions to provide additional spectrum to alleviate Wi-Fi congestion, only Globalstar's TLPS service provides an immediate solution that can also increase the nation's Wi-Fi capacity by no less than 33%, and do so over a carrier-grade network. Quite simply this is because most Wi-Fi devices already come with the ability to utilize our TLPS channel if provided with an over the air software push. This enables the use of an ecosystem of billions of Wi-Fi devices practically instantaneously, a very important aspect of the FCC's thinking.

Let's move to slide 7 and look at this more closely. Globalstar's petition requests that the FCC initiate two separate rulemaking proceedings. The first would address our immediate solution to offer any permitted terrestrial mobile wireless services, including TLPS, over our licensed 2.4-gig spectrum. On the left-hand side of slide 7, we highlight the many public benefits that will be derived by the commission taking action on this plan. Globalstar also requests a second rule making to address our long-term plan to operate in LTE-based terrestrial network across the entirety of our licensed Big LEO spectrum.

By adding our additional MSS uplink spectrum to our proposed AWS 5 terrestrial license, we can provide low-power uplink services in our spectrum as part of a wireless broadband solution. We have requested a full rulemaking in order to ensure that all parties may participate in order to establish appropriate technical rules while ensuring that no harmful interference occurs to any neighboring interests. To sum up this discussion, having met with Chairwoman Clyburn on June 20, we have now completed our meetings with the FCC regarding our petition. Further, we have responded to all of the Commission's requests for information. We are unaware of any obstacle preventing the FCC from moving forward with issuing a notice of proposed rulemaking. We believe our petition has been favorably received by the FCC and by Chairwoman Clyburn, and look forward to the FCC taking action in the near future.

Let's move to slide 8 and discuss the next steps in our product rollout scheduled for this year. In May, we introduced the SPOT Global Phone, targeting the mass retail market which leverages the significant consumer distribution channel we have built for SPOT products and expands the addressable market for satellite voice services. Only a few years ago, the notion of a satellite product targeting the consumer marketplace was met with significant skepticism. However, Globalstar proved the critics wrong with the successful rollout of SPOT and its S.O.S. and tracking service offerings. We now look to replicate this strategy with the SPOT Global Phone, which has received an excellent reception in the marketplace and accounted for over 30% of our gross additions in the quarter, even though not being on the retailer's shelves for much of this period. The SPOT brand has a loyal consumer base of over 250,000, which provides a meaningful opportunity to target existing subscribers with innovative product combination offers. The SPOT Global Phone allows us to expand the market for MSS by targeting a traditionally unserved retail consumer.

We continue to remain focused on the legacy commercial markets as well and started to see a disruptive competitive impact given our primary competitor's handset and service pricing strategies. We believe the market going forward will choose Globalstar more and more, given, very simply, our more attractive pricing and voice quality. Product innovation remains a key focus operationally, and after the quarter ended, we released the newest iteration of our award winning SPOT messenger product called SPOT Gen3. Gen3 is smaller, offers enhanced tracking features, has twice the battery life of the previous SPOT device, and with a streamlined internal design, provides an increased equipment margin to the Company.

Although shipments were not initiated until after the quarter, and therefore not included in the Q2 results, based on the positive early responses we have received, we expect SPOT Gen3 to be a strong growth driver in the second half of the year, and demonstrates once again our commitment to innovative product rollouts. We also have three additional products to be released over the coming quarters, all of which leverage our focus on expanding the addressable market for mass consumer satellite-based products through unique service offerings combined with continued effort to lower our costs. During the second half of the year, Globalstar will continue to reassert itself in the MSS marketplace.

On the enterprise customer front, we are penetrating deeper into priority industry sectors like marine and oil and gas, educating existing users and new prospects about Globalstar's superior performance. We plan to release the universal maritime kit, a feature-rich Duplex device designed specifically as a cost effective solution for the marine market. In the commercial M2M market, we are releasing the FTX3 enabling module. This latest update to our core FTX family of M2M solutions is a smaller, lighter, less expensive and more power efficient module for our customer base. The chip is also easier to integrate by bars and bands into hybrid cellular satellite products for a wide range of commercial and consumer tracking applications. This device is also central to our growing relationship with ORBCOMM, which is introducing a series of new products combining their technology and ours for enterprise in M2M markets.

On the consumer side, as I suggested, we will be introducing a new affordable personal asset tracking solution designed for the mass consumer marketplace, the first of its kind in the satellite industry. This new compact device will allow customers to trace the path of any moving asset virtually anywhere in the world, and it is powered by our Simplex and SPOT technologies. Whether to keep tabs on a new 16-year-old driver, to make sure your favorite boat is still in the marina, or to find a horse that has a way of getting beyond the fence, the product incorporates commercial grade technology but will be priced low enough to easily and cost effectively trace personal assets that otherwise would be cost prohibitive.

Please move to slide 9 to summarize. With the closing of our balance sheet transactions, we have materially improved our financial flexibility, provided a solid base of funding for growth and eliminated our near-term financial uncertainties. Our second generation constellation is virtually complete, and high-margin Duplex customers are already returning and enjoying the enhanced service quality. Our new products are launching to strong reviews and demand, and we are particularly excited about the success of the SPOT Global Phone, which is truly the first affordable Duplex satellite phone aimed at consumers. And having completed our FCC meetings in support of our petition, we hope for good news soon.

The Company expects to see a material financial improvement over the coming quarters as Duplex service and equipment revenues expected to drive EBITDA improvement. The new SPOT and Simplex products are expected to drive further upside into 2014 and beyond. The first half of the year represented a true inflection point for the Company, and we will begin to harvest the financial benefits from our network and product investments over the coming quarters. The important data points for future growth are taking shape, and we're excited to move forward after this period of transition. This concludes the prepared remarks. Operator, would you please give instructions for the Q and A?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And we have Marco Rodriguez on line with a question. Please go ahead.

Good afternoon. Thank you for take my questions. In your press release, you talk a little bit about having a bigger push in the marketing side. Can you provide a little more color on what specific initiatives you will be rolling out here, and compare and contrast second half versus first half and any time lines associated with those initiatives?

Sure, Marco. As you know, we've put out the SPOT Global Phone, and we've put out SPOT Gen3. In the fall, we'll put out the consumer tracking product as well, each of which has its own marketing initiative. We intend to increase the marketing spend to bring those products to the marketplace, and push them through the retail channels that we've described. But to do so in a responsible way consistent with growing our EBITDA as well, so you can expect that we would spend more on marketing than we had in prior periods, but at a controlled pace that does not damage the EBITDA growth that we expect going forward.

Can you kind of help quantify that? Obviously directionally you are going to be going up, but how much more are we talking about here? In terms of your marketing spend.

Yes, I don't have specific numbers, and it sort of gets close to guidance on our end, but, again, we will continue to spend more. We have staffed up already, so the cost of additional personnel will start to roll through the P&L. But the controlled marketing spend that I was describing is third-party spend that you would do with outside agencies for advertising and so forth. Again, it will be controlled. It will be increased. But we'll increase in moderation with and in proportion to growth in EBITDA.

Okay. Moving over to the Duplex gross adds or subs, without providing any sort of specific guidance, I was wondering if you could help us understand, I know directionally you're anticipating those numbers to go up. But where do you think you could maybe end the year with gross adds there on a quarterly run rate basis given the new marketing push?

Well, we expect them to increase over the gross adds that you saw in this quarter, and that will be predominantly because more and more will go through the retail channel with the SPOT Global Phone. I misspoke in my remarks a moment ago when I suggested that 30% of the new activations came from the SPOT Global Phone through the retail channel. That was 30% of sales, not activation.

But we expect the activation to now begin to show regularly out of that channel, because you've got 10,000 points of retail distribution that will end up in over time. Again, that's about as precise as I can be. It's a new product. It's a new placement in a retail channel. We're extremely bullish about it, but I don't know that I can do us both a favor by trying to be more precise with the numbers.

Speaking of the retail push here for the satellite phone, can you give us a sense as far as what you think the addressable market size might be for that?

Well, we certainly think it expands the addressable market, period. If you think about historically where product have been sold that have gone to the satellite industry pre-SPOT, it was through vertical market channels, oriented at remote industries and enterprises predominantly. So whether it was oil and gas or maritime or what have you, that is how you did it, and the way you reach them was through dealers, agents, and resellers.

So I think as soon as we go to markets like the outdoor enthusiast and markets like that, you deal with companies like REI, Best Buy, and so on, you're touching new consumers who don't know much about satellite at all. So it's a first impression game, of course, but we have aggressive pricing for the product. We have aggressive retailers who have carried SPOT before and been successful with it, so are interested in expanding the number of SKUs that Globalstar provides to them. And the results to date have been pretty bullish. Exactly trying to size the market, I don't know that I am capable of making a judgment of that.

Okay. And are you expecting the Duplex adds, that you're thinking for 2013 and beyond is going to be driven mostly by the retail market or the enterprise side?

We hope that we will go back to growing the enterprise side as we did before, and so the retail market will be additive to it. But it remains to be seen. At our peak, we distributed about 40,000 voice units through the enterprise side, and we'd like to get back to that level on the enterprise side. If we were able to do so, then the retail consumer market channel should be additive.

Okay. Fair enough. And then just kind of switching gears here, gross margins for equipment sales fell pretty dramatically sequentially year-over-year. Can you talk about what drove those results?

Sure, Marco. The margin tightening is directly correlated with the number of phones that we sell, since the phones are at a very small margin relative to our other products.

So this is all the Duplex phones?

That's right.

Okay. Got it. And so, given the fact that you're going to be pushing that a little bit harder here, is this 19% level a better level, if you will, going forward for modeling purposes?

Probably so. And just something to keep in mind is that from a cash flow perspective, that's 100% cash flow. So while on the income statement, the margin looks tight, we like to look at it from a cash flow perspective, positive news.

Got it. Okay. Last question, and I'll jump back in queue. Interest expense kind of doubles here sequentially. Were there some extra items in there?

I'm sorry, can you repeat the question, Marco?

The interest expense doubled.

Right, I'm sorry. That was due to a lot of the notes, our outstanding convertible notes converted during the quarter, which when you write off some of the debt discount, it just flows through interest expense. It's an accounting entry that's made upon conversion.

I'm assuming you will have more detailed breakout in the filing in regard to that.

Yes.

Got it. Thanks a lot, guys.

No problem.

(Operator Instructions)

And we have no further questions at this time. I would like to turn the call back to Mr. Monroe.

We thank everybody for joining the call. We see there were about 70 people that joined today, and we thank you for that. We look forward to speaking to you again in roughly 90 days. Thank you very much.

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