Globalstar Inc (GSAT) 2015 Q4 法說會逐字稿

Welcome to the Globalstar Incorporated fourth quarter 2015 earnings conference call. My name is Adrian, and I'll be your operator for today's call. (Operator Instructions). Please note, this conference is being recorded. I will now turn the meeting over to Jay Monroe, Chairman and CEO. Jay Monroe, you may begin.

Good afternoon, everyone, and thank you for joining the fourth quarter 2015 earnings call. Today, I will provide an operational and regulatory update followed by a review of the financial results by Rebecca Clary. Tim Taylor will then join us for Q&A.

Please note, this call contains forward-looking statements intended to fall within the safe harbor provided under the securities laws. Factors that could cause results to differ materially are described in the forward-looking statement section of today's press release and in Globalstar's SEC filings.

After welcoming Kenny Young, the President and CEO of wireless infrastructure and consulting firm LCC International, to our Board of Directors during the third quarter, I'd like to start the call today by welcoming Dave Kagan, President and Chief Operating Officer, as the newest addition to Globalstar's management team.

Dave is a satellite industry veteran previously serving as the President of ITC Global and, before that, as President and CEO of both Globe Wireless and MTN. Time and time again during his career, Dave has driven substantial revenue and profit growth, making him one of the most respected operators in our industry.

And though he's only been here for five weeks, he's already making important improvements to our operations. Dave has years of experience managing all the revenue and profitability levers for satellite companies, including responsibility for worldwide sales and marketing, ground and product engineering, IT, software, customer care, and the constellation, all of which now report to him here at Globalstar.

While our business has meaningfully improved over the past few years, Dave is charged with accelerating this growth as we enhance our product and service capabilities with the completion of the second-generation ground upgrades and introduce a host of new products.

After a diligent multi-month search reviewing hundreds of candidates, I know we've landed the right person. Please know that I remain fully involved in the day-to-day operations of the Company and look forward to collaborating with Dave to dramatically expand our MSS business.

Operationally, we added nearly 50,000 net subscribers to our network last year, and half of these in our SPOT business. In the fourth quarter, Duplex gross additions increased 29% from the fourth quarter of 2014. This was driven by our expanded international presence, which has also helped increase SPOT gross additions by 14%.

For the full-year 2015 versus 2014, gross additions in Duplex and SPOT increased 30% and 19%, respectively. This growth occurred even in the face of the well-reported downturn in the oil and gas sector, where we added only 16,000 M2M units this year versus 56,000 last year.

We continue to invest and expand our non-North American operations. And these markets account for an ever-increasing percentage of our revenue and subscriber base. For example, in 2014, non-North American gross subscriber additions across all product lines accounted for 25% of our new subscribers. In 2015, that number dramatically increased to 41%.

Although every international carrier has experienced exchange rate headwinds when foreign revenue is translated back into US dollars, we remain fully committed to making investments outside of our core markets and will continue to invest in expansion through new second-generation ground infrastructure and new product development.

Our Asian and African businesses are nascent today, but we expect these markets to materially ramp in the second half of the year. So, we will invest in these. Whereas historically, we relied upon the productivity of partners in foreign countries, we wholesaled bundled minutes at comparatively low ARPUs, we now operate through more direct ownership over Globalstar's service territories.

Whether by acquisition, new gateway construction, or leveraging existing infrastructure in new countries, we are seeing significant opportunities outside of North America. And we will continue to invest in expansion over the coming years.

Moving to the status of the second-generation ground upgrades, as we previously said we would do, we successfully completed the installation and testing of all Hughes radio access network equipment in our core North American and European gateways by the end of 2015.

Further, we will have a RAN installed in Puerto Rico in a few weeks, which will provide contiguous second-generation service coverage in the Caribbean.

Having already installed and site-accepted Ericsson core network equipment in North America, the final production acceptance testing, including roaming, short messaging, multimedia messaging services, will be complete this quarter.

Our product teams continue the development required to leverage the capabilities of the second-generation ground system. And we're excited to take advantage of the cost, speed, applications, and form factor improvements provided in these products. Our channel partners are gearing up to sell a host of new Globalstar offerings, which are smaller, less expensive, and provide service and speed improvements that will materially improve consumer and commercial satellite access.

This includes not only enhanced services for the current satellite subscribers, but introducing satellite connectivity with increased performance capabilities that can be used in ways not possible today with Globalstar or our competitors.

We look forward to bringing these products to market soon. And we'll be working diligently to improve the design of these devices and to bring out cost to ensure that the very first rev will deliver all of the cost and functionality benefits possible in new-generation products.

The ground upgrades provide Globalstar with opportunities in new markets where our products can now be competitive or superior to those of other service providers. For example, just this week, we entered into a partnership with Avidyne Corporation, a leading provider of integrated avionics and [ADFB] systems for general aviation aircraft.

Avidyne is a highly respected industry participant, who we have partnered with to develop new integrated products for the aviation market. Avidyne will then market these through its vast global dealer network.

With this partnership, we are targeting the general aviation and corporate jet markets for low-cost voice and Internet access, providing capabilities including real-time weather, flight tracking, and integration with flight department operation centers. This is an early example of what we expect to be many partnerships enabled by the capabilities of the second-generation ground system.

Now, let me comment on the TLPS proceeding, which I know is very important to most of our investors. We have been very pleased by the level of attention that the commission has given our proceeding over the past months.

During this time, we hosted a number of FCC officials at the Washington School for Girls deployment in DC. There, the students have been using TLPS every school day since last October, benefitting from the improved performance and showing that TLPS coexists perfectly with a range of other products and services.

Students now have top-of-the-line broadband access to online tutorials, lessons plans, testing, and other educational resources to enhance their skills and their college preparedness.

The results of this deployment have further confirmed that TLPS on Channel 14 is not a risk to the performance of existing services. Given that students are now able to use four channels, including TLPS, rather than just three channels without it, it's no wonder that they're receiving superior service in a previously Wi-Fi-challenged environment.

TLPS improves everyone's mobile broadband experience by reducing co-channel interference and by simply providing more channels, realities we have shown consistently in all of our deployments in the last year, beginning with the March 15 demonstrations at the FCC and then last summer's extensive Chicago testing, which showed a near doubling of network throughput, and finally with the long-term deployment at the Washington School for Girls.

Early this week, we submitted an ex parte letter documenting recent meetings held at the FCC with senior staffers. Although we firmly believe that the record is complete and unambiguous regarding TLPS coexistence, during those meetings, we expressed our support for safeguards that minimize any potential risk of disruption.

These safeguards include, first, an effective equipment certification process, and second, requirements for Globalstar's proposed network operating system. Among other benefits, including user authentication and the provision of carrier-grade network management, akin to the network management techniques employed by cellular carriers, this NOS will allow public channel operators to provide notice to Globalstar regarding any claimed detrimental interference. And Globalstar will then effect remedial measures if it's determined that TLPS operations are the source of any interference.

Think about the NOSs providing an extra measure of protection to both licensed and unlicensed services that totally ensures that no detrimental impact can ever occur without being quickly eliminated.

We anticipate a very active period in the proceeding over the near term. We've showcased the consumer benefits of TLPS in multiple forums, which prove that opening up new spectrum in the 2.4 gigahertz, a band that is still Wi-Fi bands preferred by consumers and operators, despite growing congestion, provides significant and immediate congestion relief and undeniable consumer benefits.

We believe that the service as structured in the FCC's proposed rulemaking is good policy for the commission.

Finally, I want to state that, given the current status of the proceeding and in deference to the commission's deliberative process, it is in all of our best interests not to provide any additional comment or answer any questions during the Q&A on the subject of the proceeding.

However, we do look forward to speaking with you again on this subject when we have additional information to share on the FCC process.

I'll now turn the call over to Rebecca to discuss the financials.

Thank you, Jay. Good afternoon, everyone. Today, I will cover the primary factors contributing to our financial performance and will provide an update on our liquidity position.

As Jay mentioned, we've experienced meaningful growth in our subscriber base as we see the return on our continuing investments in both new and legacy markets and successful sales and marketing initiatives. These investments drove an almost 50% increase in the number of phones sold in 2015 and a 7% increase in the number of SPOT devices sold in the same period.

Year over year, we experienced a modest increase in total revenue, despite significant pressure from the strengthening of the US dollar. Without the impact from foreign exchange rate fluctuations, total revenue would've increased $5 million or 6% during 2015. Growth in our subscriber base offset the negative impact from these currency changes.

On a year-over-year basis, total subscribers increased 8% to approximately 688,000 subscribers. New SPOT customers represented over half of this increase. Service revenue increased $4.3 million, which was offset partially by a decline in revenue generated from equipment sales, reflecting the decrease in the average selling price of our handsets.

Beginning in early 2015, we lowered the selling price to drive sales and reduce inventory in advance of second-generation equipment, which we expect to launch later this year.

Now, focusing on our quarter-over-quarter financial performance, as shown on slide 8, total revenue increased 3% from $22.1 million in the fourth quarter of 2014 to $22.8 million in the fourth quarter of 2015. This increase was again driven by growth in service revenue, offset partially by a decrease in equipment revenue.

Similar to year-over-year operating results, we saw expansion in our subscriber base for Duplex, SPOT, and Simplex, which reflected the increase in the number of units sold during the past several months and drove the increase in service revenue.

Service revenue improved $1.6 million or 9% from the fourth quarter of 2014, with SPOT service revenue contributing over 80% of this increase. The growth in SPOT service revenue was due to an 11% increase in average subscribers from the fourth quarter of 2014, driven by the successful sales campaigns during the fourth quarter of 2015, and a 6% increase in ARPU due to the higher-priced tracking features on our newest SPOT gen-three device, which now accounts for twice the number of subscribers than in the fourth quarter of 2014.

Duplex service revenue increased 5% from the fourth quarter of 2014, contributing $300,000 to the total service revenue increase. This Duplex increase was driven by 15% growth in average subscribers, offset partially by a 9% decline in ARPU, which was due almost entirely to the negative impact from the foreign currency changes previously discussed.

Duplex service revenue, which is impacted by exchange rates more than any other component of revenue, would have been $600,000 higher in the fourth quarter 2015 for a total increase of 14% instead of 5% if there had been no change in foreign exchange rates since the fourth quarter of 2014.

Equipment sales revenue in the fourth quarter of 2015 decreased $900,000 or 18%, driven primarily by reduced selling prices for our core, Duplex, and SPOT products.

Although we sold 34% more handsets during the fourth quarter of 2015 compared to the prior-year's fourth quarter, a combination of our promotional offers and the effect of changes in exchange rates sales denominated in foreign currencies resulted in a reduction of revenue recognized from these equipment sales.

Given the market's positive reaction to these promotional offers and the value and generated monthly recurring service revenue, we plan to continue this sales strategy into 2016 as we deplete our remaining inventory of phones in advance of introducing new second-generation products.

Adjusted EBITDA for the fourth quarter of 2015 was $5.2 million, reflecting a $1.4 million or 37% increase over 2014. This growth was driven by an increase in revenue for reasons previously discussed and a decrease in expenses, resulting primarily from lower cost of subscriber equipment sales and cost of services, both of which decreased by $800,000, excluding EBITDA adjustments.

These decreases were offset partially by higher MG&A of $500,000, also excluding EBITDA adjustments. Over 70% of the decrease in the cost of subscriber equipment sales was related to the reduction of the carrying value of our phones at the end of 2014.

The decline in cost of services reflected the impact of changes in foreign exchange rates, which affected contracts, personnel costs, and other expenses that are denominated in foreign currencies. These costs are lower after being translated into our dollar-denominated financial statements.

Offsetting these expense decreases were higher costs resulting from enhanced marketing efforts and geographic areas where we are introducing or expanding our presence, including Latin America, Africa, and Asia.

The sales promotion programs previously discussed also contributed to the increase in MG&A expenses because a portion are treated as subscriber acquisition costs.

Net loss was $26.8 million for the fourth quarter of 2015 compared to net income of $92 million during the fourth quarter 2014. This fluctuation is due primarily to the change in the value of our derivatives, which resulted in a loss in the fourth quarter of 2015 and a gain in the fourth quarter of 2014. These noncash valuation adjustments are driven primarily by changes in the price of our common stock during the respective periods.

Offsetting the impact of the derivative gain recorded in the fourth quarter of 2014 was a $14.4 million reduction in the carrying value of certain Duplex inventory.

And now, for an update on our liquidity position, as of December 31st, 2015, we had liquidity of approximately $105 million, including an unrestricted cash balance of $7.5 million, $60 million available under our common stock purchase agreement with Terrapin, and $38 million held in a debt service reserve account, which is restricted to making principle and interest payments due under the COFACE facility.

In February 2016, we drew $6.5 million under our Terrapin agreement, leaving $53.5 million that we can draw through August 2017.

Projected contractual obligations over the next 12 months include primarily debt service payments due under our COFACE facility and capital expenditures that predominantly relate to the work being performed to upgrade our gateway infrastructure.

Debt service amounts include semi-annual principle payments due under the facility in June and December 2016, which total approximately $33 million, as well as semi-annual interest payments due under the facility and subordinated notes, which in aggregate we estimate to be approximately $22 million.

We estimate that cash obligations due to our vendors assisting in the upgrade of our gateway infrastructure will be approximately $8 million during the next 12 months. Together with cash flows from operations, we fully expect our cash inflows to be adequate to cover our cash outflows during 2016.

To conclude, we are encouraged by the growth in our subscriber base, both in our traditional markets and in markets outside of North America. The increase in the number of phone sales and Duplex activations from 2014 to 2015, which grew 48% and 29%, respectively, are strong indicators of continued growth in our high-margin Duplex service revenue.

In 2016, our focus remains squarely on improving the financial performance of our core operations. At a macro level, the steps to accomplish this growth include completing our second-generation ground upgrades, launching our second-generation products, and concentrating on driving meaningful contribution from international markets.

I will now turn the call back over to the operator for Q&A. Operator?

(Operator Instructions). Kevin Roe, Roe Equity Research.

Thank you. A couple questions. Given your outline for launching new geographic coverage, Asia and Africa in the second half, you mentioned the Caribbean, new handsets coming out. How should we think about gross additions ramping in the second half versus how we exited 2015?

Hey, Kevin. How are you this morning or this afternoon?

Good. Thank you.

I don't think we have specific guidance on the ramp, but those territories that you just mentioned, except the Caribbean, which is already up and operating and has been for some time, will be real contributors to the future growth.

Africa we opened up during this year. And we expect good things from that continent here in 2016. And Asia, we don't expect much from until the latter part of the year. And that's because there's certain requirements there for us to certify products into countries that have not yet completed. And we've got a team in place over there that is beginning to work in earnest. But, as I said in my remarks, I don't think we anticipate much happening there until the second half of the year.

As you go forward from that, though, those are areas that, for a lot of different reasons, will be major contributors to Globalstar in the future.

Okay. That's helpful. And I appreciate your commentary on expressing support for safeguards in this TLPS process. I wonder if you could bring investors up to date on work Globalstar's done on your proposed network operating system and your vision for that network operating system and any other specific progress you've made on safeguards that you highlighted earlier.

Kevin, I appreciate the question. But, as I said in the prepared remarks, we cannot take questions today on TLPS or on the FCC proceeding. We're certainly happy to answer any other questions you have on the MSS business or on the Company generally, pleased to take those and answer them. But, in the subject of TLPS, we're unable to answer additional questions on that.

Okay. And lastly, a pretty material sequential increase in EBITDA this quarter, which is nice to see. How should we be thinking about EBITDA progression in 2016 versus 2015, given all the new network spending, market launches, etc., that you have to do?

Hey, Kevin. It's Rebecca. I would expect, with increases in service revenue, which as you know is our high-margin business, that would have a direct impact on EBITDA. So, I would expect continued increases as we move through 2016, given our current Duplex promotions particularly that seem to be really successful in the market and then new product introductions later on this year.

Okay. Thank you.

Jason Bernstein, Odeon Capital Group.

Hi, guys. Thanks for taking the call. Question, on the MSS side, Jay, where do you think the price point has to get to on the phones or where can the price point get to? And are there any further new developments on the product side, new phones that can be featured with the second generation? Trying to get an idea of what the addressable market size is. And are we still talking about the phone price at $1,000, or can that be driven lower?

Jason, first, the initial product that we'll bring to market for the second-generation ground infrastructure is Sat-Fi. And that device is one that we will keep driving the cost out of every day, every six months. It will be a small fraction of the $1,000 that you described. But, exactly where it'll price out at this moment hasn't been determined inside the Company.

But, if you'll recall, when we started out with the SPOT product back many years ago, the device at that time, just the core device that was recreated in a different form factor for SPOT, was about $500. And today, we manufacture that product at a tenth of that.

So, that's what we have to do. The mechanisms to take a price down lower than what we'll start out at are well known to us. They're well known to the industry. And they're not necessarily just about scale. But, it is our objective, of course, over time to make that product, Sat-Fi, as inexpensive as possible for the reasons that you alluded to. If you can make a product that costs $100, the market is quite different than if the product is $1,000. And it's our objective someday to be at $100 for exactly that reason.

So, is Sat-Fi going to be what you envision as the sort of primary access device on the Duplex side?

We actually have couple of different devices. But, over time, just as we have today many different voice and data products, whether those are Duplex data or Simplex or future devices, which are two way but smaller bit, all of those are initial products followed by many more that are leveraging off of the same architecture.

When you think about what SPOT was, SPOT was a big Simplex product that became SPOT, that became SPOT2, SPOT3. It became Trace. It was HUG and a ton of different variants in that product alone. And on the industrial side, they were the STX3. And they were a whole number of different products.

And we expect to do the exact same thing with Sat-Fi as the core product. The Sat-Fi can become just a data product. It's inside. It's got the same functionality as you would find on a data board. It just also has voice. And so, there are a ton of variants. And we expect to bring those to the marketplace one after another, just as we have for the last 5 or 10 years.

Great. Thanks.

(Operator Instructions).

Operator, we have no additional calls at this time. So, I want to thank everybody who dialed in and those that are listening to this call on the Internet today. Thank you very much for joining. And we look forward to having a conversation together again in the near future. Thank you.

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