Globalstar Inc (GSAT) 2017 Q3 法說會逐字稿

Welcome to the Third Quarter 2017 Globalstar Inc. Earnings Call. My name is Eric, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Jay Monroe, Chairman and CEO. Please go ahead.

Good afternoon, everyone, and thanks for joining us to discuss third quarter results. Following my prepared remarks, Rebecca will provide overview of the quarter's financials followed by Q&A. Tim Taylor will join us then.

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

The third quarter was another strong quarter in MSS, with revenue up 19% year-over-year. Strong ARPU growth in both SPOT and Duplex continued to be the primary drivers, but we also saw strong subscriber additions as well. Once again highlighting the operating leverage inherent in this business, adjusted EBITDA grew 68% from the same quarter last year and was 20% higher than Q2. At $9.9 million, Q3 adjusted EBITDA represents the highest quarterly level in a decade. It would be challenging to find a wireless operator growing like us and even more challenging to find satellite operators doing so.

While we caution against assuming this trajectory will continue indefinitely, we are pleased with the performance and it's a clear demonstration of our operating leverage. We see many opportunities ahead of us in MSS and are eager to execute on those initiatives. These begin in earnest with several new products, which we expect to release in the first half of next year.

For sure, our hearts go out to those affected by the multiple natural disasters our country has faced over the last few months. The periodic destruction of land-based infrastructure is an unavoidable reality for many living in certain regions. A reality we know all too well in New Orleans. While our satellites are not suited as direct replacements for broadband Internet in those regions, we offer the peace of mind that you can still communicate with your office, emergency personnel, conduct military communications and keep in touch with loved ones. The storms this year remind us all that communications with first responders and other critical staff remains a problem today and we are helping provide as much service as needed. We are proud of the performance of our network and personnel during these difficult times and hope we have helped ease the burden on many of those affected. I'm also proud of how quickly our team was able to respond to the request for organizations, including FEMA and other volunteer and federal agencies. We worked to ensure that products and services were available immediately and teamed with distributors who efficiently dispatched large emergency shipments of equipment.

Going forward, we will continue to develop new products that address the unique demands of emergency response and will work with our customers to ensure we offer the applications that are of the highest lifesaving value. Just as we've done with our SPOT franchise, which has now notched over 700,000 total sales and more than 5,300 rescues.

During the quarter, we announced 2 significant business development opportunities, which are indicative of our broad efforts to expand both our domestic and international presence and I'll announce a third one today.

In September, together with our partner, IPmotion, we began operations in Japan, the world's third largest economy. Japan's geography and commercial activities provide a significant opportunity for MSS and we're pleased to be in a position to transition our efforts towards sales now since completing the regulatory process. We're excited by Japan's leadership and product technology and expect our IoT product development efforts to be accelerated with these new partners. A few weeks ago, we also announced a partnership with the University of Mississippi, where we will construct an on-site ground station as part of the school's new STEM facility. This is an excellent partnership with Ole Miss and we look forward to next year's groundbreaking.

And third, as part of our continued focus on evolving our product and applications offerings, we will soon bolster our senior management team with the addition of 2 experienced executives. These new hires bring with them a valuable mix of expertise and existing relationships, including with Fortune 500 companies exploring differentiated capabilities, only made possible by our satellite architecture. These new opportunities include applications that demand near-global landmass connectivity as well as applications that are best served via a single contiguous service provider for cross-border connectivity. We expect these new additions to have near-term impact and look forward to making formal announcements very shortly.

In early October, a few days after the quarter-end, we completed the capital raise we discussed last quarter, satisfying a requirement of our amended senior debt facility. We raised $115 million in net proceeds, of which Thermo accounted for approximately 40%. Following the $33 million invested in June, Thermo has invested $76 million into Globalstar during 2017 and about $700 million since 2004. Globalstar is one of the largest positions for Thermo, and Globalstar is where I am focused almost exclusively.

That said, I didn't have to make this investment because demand from other investors was more than adequate, but Thermo has always invested where we see an opportunity to put capital to work at an attractive price and the financing here was aligned with that tenet. The market has yet to recognize the full value we see in Globalstar's assets, but given time and our continued performance, I'm sure that will happen.

Let me shift to Spectrum. During the quarter, we initiated the 3GPP process. And for those of you who are less familiar, 3GPP is a global wireless standards body that produces technical specifications for new band classes. As we've discussed in the past, while our Spectrum is capable of being operational without 3GPP approval, we believe future partners value a standardized band and thus we are taking the next formal step in this process with an application filing in December. We have strong support from chipset and infrastructure providers as well as other interested parties and we'll work towards finalizing a defined band class as soon as possible.

In the meantime, we are working with third parties on the development of prestandard chipsets and infrastructure. The support we have received from ecosystem participants has been encouraging, most notably, Nokia. Nokia commissioned and has conducted a study over the last month of our Spectrum compared to AWS in a major metropolitan area. Last month, they completed their study and concluded that there was significant benefit to using Globalstar's dedicated 2.4 gigahertz spectrum, which is clean and free from macro interference in both indoor and outdoor deployments. Their study also demonstrated robust coverage for a 2.4 small cell-only band and showed how our 2.4 produces significant capacity improvement outdoors when compared to a network that is interference-limited by macro.

In addition to increased capacity, our 2.4 can be deployed with less physical infrastructure leading to significantly lower deployment costs. Indoor performance was also superior using our Spectrum since the network is not affected by macro RF interference between high-power outdoor base stations and local indoor small cells operating on the same spectrum. This study is very significant and we're using it as we continue conversations with existing service providers looking to expand their network capacity as well as new entrants looking to disrupt the landscape.

Regarding the international regulatory effort. We continue to make progress on our plans to globally harmonize our 16.5 megahertz of S band spectrum for terrestrial use. We are engaged in [subsinative] discussions with numerous regulatory agencies, including several countries where applications have already been filed. In total, these new countries represent a combined population of 800 million and we're encouraged by the reception we have received around the world.

In many cases, we need to secure the MSS license first, like in Japan, and set up a local subsidiary before applying for the terrestrial license. All of this takes time, but we're making great progress. In fact, we expect to receive our first international approval for terrestrial authority in the coming weeks. While this first country is not particularly large in terms of population, it has strong precedential value in many different ways and we look forward to finalizing the authority in the near term.

Also as we said last quarter, there is not much we are going to say regarding an update on the strategic process. What I can tell you is that Thermo is firmly committed to realizing a return not only on all of the capital invested in Globalstar, but also on our time. This special collection of assets will get more valuable in the years to come. We are executing on all fronts: MSS, domestic spectrum and international. And today, we have the cleanest balance sheet since the company was founded. We're supplementing our management team and look forward to continuing to improve financial and strategic results. I'm convinced that the wireless networks of the future will only be able to deliver on their promise with greater density, and believe our Spectrum will play an integral role in new networks, including 5G topologies.

In addition to increasing wireless data consumption, developments like mobile edge computing, VR and AR, will only work well when dense networks with our spectrum is well suited to support.

Further, I believe small cells are best enabled by using clean, dedicated spectrum with the physical and regulatory benefits of our band. And to have this position globally is a significant opportunity, which we are in the very early innings of exploiting. There is literally no other company in the world which enjoys such a unique spectrum opportunity, and we're going to work tirelessly to maximize its value.

Now I'll turn the call over to Rebecca, who will provide more detailed overview of Q3 financial performance.

Thank you, Jay, and good afternoon, everyone. We continue to report strong financial growth from the prior year with total revenue up 19% during the third quarter, driven primarily by service revenue, which was higher in all areas of our business. Over 30% of the increase in service revenue was driven by Duplex, which was up $1.3 million, propelled by a 22% increase in ARPU. ARPU has grown significantly over the past several months as we have adjusted service rates across our subscriber base. Several factors have contributed to this increase, including the refresh of our rate plan lineup in our core market, together with the elimination of our lowest priced entry-level plan. We have been successful in this migration, while still offering some of the most competitive pricing plans in the MSS industry.

We also have been strategic in the sale of our remaining first-generation inventory by encouraging higher-priced plans upon activation, while focusing sales through certain distribution channels and markets. This strategy maximizes the recurring service revenue generated from these sales but also results in a slowdown of equipment sales, contributing to the 6% decline in our average subscriber count compared to the prior year.

SPOT service revenue also improved significantly from the third quarter of 2016, up 16% due to an 11% increase in ARPU and a 5% increase in average subscribers. The increase in ARPU reflects the changes we have made to our rate plans to bundle options, including tracking capabilities with our basic access plan. An increase in activations also contributed to higher ARPU as new subscribers joined the network on rates higher than our previous blended ARPU level. An increase in revenue generated from subscriber equipment sales also contributed to higher total revenue. This increase was driven primarily by our role in assisting with disaster recovery effort following the hurricanes that devastated parts of Texas, Florida and Puerto Rico this summer. Not only was 2-way connectivity paramount during the aftermath, particularly in Puerto Rico, where cellular service is still unreliable but emergency responders also relied on our one-way tracking devices to monitor relief aid resources that they deployed, including heavy equipment, storage containers, generators and temporary housing.

We reported net income this quarter due primarily to a noncash derivative gain, resulting from the decrease in the value of our derivative liabilities from the prior quarter-end. This derivative gain reflects the decline in our stock price from June 30 to September 30 in addition to other underlying input and assumptions used to calculate our derivative value. Certain noncash items partially offset the impact of this gain, including depreciation and a loss in extinguishment of debt, which we recorded following the conversion of 8% notes in August.

Adjusted EBITDA increased 68% to $9.9 million during the third quarter of 2017, due primarily to a $4.9 million increase in total revenue, offset partially by a 5% increase in operating expenses, excluding EBITDA adjustments. The 19% increase in high-margin service revenue had a direct and meaningful impact on our operating results and continues to be the largest driver of our EBITDA growth.

On the liquidity front, we ended the quarter with an unrestricted cash balance of $16 million and $38 million in a restricted debt service reserve account. Subsequent to the quarter, we closed a common stock offering that generated $115 million in net proceeds, 80% of which were deposited into a restricted account that we expect to use for our next 2 principle interest payments, totaling $117 million and funding of our debt service reserve account of $13 million. This equity raise satisfied the final condition subsequent for our recently amended facility agreement, thus eliminating a major short-term liquidity requirement and solidifying the flexibility provided by the amended provisions within that agreement.

Furthermore, we continue to delever our balance sheet as the net proceeds from this offering, together with the conversion of over 90% of our outstanding 8% notes during the quarter, resulted in a $130 million reduction in net debt compared to June 30 on a pro forma basis.

We are pleased with our ability to have addressed our liquidity needs for the next year. We're also encouraged by our recent financial performance, particularly our ability to drive significant increases in EBITDA, with the expansion of free cash flow as we expect minimal CapEx in the near term.

Today, Globalstar is a growing satellite business, even prior to the launch of any new product, with a much improved liquidity profile and U.S. terrestrial authority with a 2.4 gigahertz spectrum. We are better positioned now than ever to drive value from our satellite business and spectrum assets both in the U.S. and abroad.

With that, I will turn the call over to the operator for Q&A. Operator?

(Operator Instructions) And our first question comes from John Petrozzi from Muller Road Capital.

So I just want to kind of get your thoughts. It seems like a very interesting time on the strategic side in the is space generally, with deals being discussed across cable, telco, wireless among some of the larger players out there. I was wondering from kind of a sea suite level, how you view some of these prospective movements; and more specifically, how GSAT fits into these potential new paradigms that are being created? And then, maybe that can lead into some additional comments where you stand on the strategic side types of discussions, intensity of discussions, and whatever else you may be able to feel comfortable disclosing.

I think, John, that what's going on right now needs to fall into place before we can answer the question of where Globalstar might fit into that changing environment. You can imagine that a Sprint-T-Mo deal, if it were to occur, would set off a raft of follow-on activities that would be interesting and we would of course be part of those discussions. The one that was rumored today, which is really the Charter-Sprint deal or yesterday is one that would set off, I think, different events. But each and every one of those, once they begin, will probably create opportunities for people that we're in discussions with to look at us a little bit more seriously in the light of the changing chairs. So I think we're kind of operating under the assumption that we have to stay tuned and stay flexible. And in the meantime, we're doing all the work that you would expect of us in terms of making people aware of what the spectrum is capable of doing. We talked about the work that Nokia has done recently. I mean, how important that is, I think, to people's analysis of how the spectrum can be utilized and that's the process that I think we're in for the moment. We've also undertaken additional tests with other third parties which are being completed now, which will provide more clarity in different operating scenarios than the work that was done from Nokia. It'll be interesting to see how people take it and understand it and think about in the context of their businesses.

Okay. Great. Is the Nokia analysis publicly disclosable?

It is not. It is something that we're using with other people under NDAs. And it was a study undertaken by Nokia and is, therefore, their property and ours at this moment. But it's not something we want disseminated very, very broadly at this moment.

It sounds like an exciting review of the spectrum for sure.

You know the results of it are what you would anticipate; certainly, what we've talked about for a long time and so interesting to get it validated from a company that's as efficient and successful as Nokia in those realms. When you look at the results, you see pretty quickly what the value is of spectrum that doesn't have anything else going on within it is. And when you have a macro architecture right next to a small cell, the implications of that when it's in the same spectrum are obvious. We talked about that for a very, very long time. And I think when you see the results on paper, you go yes, yes, makes perfect sense. You need a lot less infrastructure in order to do a given job. And you can create a lot more capacity. And again, it's no surprise. The spectrum is completely pristine. And there's nothing else that's interfering with it from a macro perspective. So the result is pretty dramatic.

And our next question comes from Jason Bernstein from Cantor.

Just 2 quick questions. On the international side, is that 16.5 megahertz at full power? Are you still expecting that these approvals will be for that amount at that level?

Sure. So it depends on the regulatory domain. We have a 1-watt, 4-watt restriction in the U.S., but that doesn't necessarily apply to every ongoing foreign process.

And so given that the pops there could dwarf what's in the U.S., how do you guys think about optimizing the international opportunity while doing a transaction in the nearer term in the U.S.? And what sort of structure that can take on?

I think we're certainly interested in making certain that large international companies understand that this spectrum is able to be certified in different regions of the world. Because additional players come into the discussion at that moment and clearly in certain parts of the world, you can find players that are the equivalent of the Verizons, the AT&Ts in the United States, but there are a lot of tech players who are interested in more global operations. And so for us to be able to prove it up in other places is important. As I said, there are multiple precedential values arranged by having this first approval in place, which we are hoping is something that we can talk about more broadly soon. It is 16.5 megahertz. That's something, of course, that's a little bit different and broader than it is within the United States and something that we are seeking everywhere else we go. And it'll be very, very interesting to see whether and when we have this one, and whether other countries around it are also willing to approve the spectrum rather quickly. We're certainly in conversations with many across every single continent. So time will tell. Clearly though, there are different parties and different opportunities for us to explore in a case where within the United States, you have perhaps leased the spectrum. If you lease the spectrum at any valuation that we're all familiar with, that's a lot of money every year and it creates extraordinary flexibility in other parts of the world to do more and more creative things. You don't have to the same thing everywhere for sure.

And our next question comes from Jason Mudrick from Mudrick Capital.

I'm looking at the Charter filing with the FCC from last month on the 3.5 docket, which I'm sure you guys have seen and reviewed extensively. And I was just -- I had, I guess, 3 questions relating to that. So I'm looking at -- I know you don't have it in front of you, but the slide that talks about how they plan on getting into mobile. They talk about MVNO, which is I guess reselling Verizon or other carriers for coverage, but then small cells for capacity. And it specifically says, offloading MVNO traffic to Wi-Fi small cell infrastructure is critical to customer experience and economic success and mobility. And it has some diagrams here that show starting with Wi-Fi, but eventually moving to transmitting with small cells through 3.5 gigahertz once -- if and when it's available. I guess my questions are, first, how we should think about how someone like a cable co could use your 2.4 to offer a mobile service like Charter is talking about indoors initially? Question two sort of related, but how you would think about licensed 2.4 compared to what the FCC is talking about doing with unlicensed 3.5? Just sort of pros and cons of comparing those 2 options if you are a cable co or any new entrant. And then, I guess the last question, which is somewhat different but related is, how you guys are thinking about the competitive dynamic between telco carriers and cable cos when you have cable companies now actually talking about like truly getting into mobile as opposed to just offering the service on a reseller basis? And how the industry is thinking about -- how Verizon or AT&T or others might respond to cable guys actually coming into their business and their turf? I know that's a lot of questions, but I apologize.

No problem. I'll definitely get after them. So on the question of indoors and 2.4 versus 3.5 and mobility, let me kind of put all those -- all of those together and talk about that for a moment. When it comes to true mobility, you're obviously going to get a mobile product at 2.4. It's much more challenging to have a truly mobile product at 3.5. So that's an absolute differentiation between the 2 bands. But importantly, how do these 2 bands operate together, which is I believe a potent question for the cable guys. 2.4 is licensed and use the term unlicensed for 3.5. I agree with you. So others might call it lightly licensed but regardless, it's not the same as a licensed piece of spectrum. We've looked at this and decided that as we get through the 3GPP process, the very first 2 bands that we will specify in the process as carrier aggregation bands are in fact the 3.5 and the 5 gigahertz. We'd use 5 gigahertz in an LAA configuration and 3.5 in an LTE spectrum aggregation configuration. And I think that if the jury is out on whether a cable company will be able to use 3.5 and think about that as an exclusive band for their customers. Because it's changing, it's changing in different pieces of geography, depending upon how the rules come out, it's changing in time. It's definitely different in power levels. I'm only certain of the power levels we [have]. Many of the power levels are very low. I mean, so how do you mix and max that if you're Charter and you want to offer a uniform product across the United States? The answer is you can't. At least you can't use it exclusively. So you're going to want to anchor it to something. I still believe that the cable companies will wake up at some point or another when they fully understand 3.5 and say, you know what? We still want to be able to move as much traffic as possible off of the MVNO for obvious economic reasons and so we need a piece of licensed spectrum. And Globalstar can be that piece of licensed spectrum. Everybody in the cable world wants to go to a small cell configuration, folks in the carrier world are going to a small cell configuration and there's clearly no spectrum better from a mobility perspective and a small cell perspective than a piece of licensed spectrum at 2.4. So we're extremely interested in participating in those discussions and in fact, we're in those discussions. How they'll come out depends a little bit on some of the macro chair swapping that's going on right now. What does it mean if Charter and Sprint merge? Well, it probably doesn't mean something great for Globalstar 2.4, given the amount of Sprint 2.5 there is. But that means somebody else is disenfranchised. And therefore, it's an important opportunity for us. So that's the way that I look at the 2.4 and the 3.5. We will absolutely participate in the 3.5 through carrier aggregation.

Now, telco versus cable co competition. One thing we do know is that the competition will be tough. These are huge, huge EBITDA industries and each guy wants to eat off the other one's plate. So they are going to fight out this thing and it's going to go on for a very, very long time. I mean, I'm sure that you were surprised. I was a little bit surprised when the guys at Comcast last week announced their results. They already had 250,000 -- more than 250,000 XFINITY wireless customers. That's pretty fast. I mean, a week or so before that they were talking about 200,000. At that pace, I think they'll have a million customers this year. And -- though that's not anything like the scale that you would anticipate or see from the major telcos, it's still -- that's a lot of customers fast and somewhere along the line they're not going to want to do all of that with the carriers, and the carriers are not going to love enabling their competition. And so they are going to need licensed spectrum, and we anticipate that we'll be a piece of the licensed spectrum that they gravitate towards because it's manifest destiny, right? It's New York to California and everything in between. And when you got that kind of a spectrum position with that uniformity, I think it's going to be valuable to them.

(Operator Instructions) And our next question comes from Jack Hartnett, Quadrant Capital.

A question I have -- as you look at the improvement you've achieved in -- on the balance sheet, liquidity, et cetera, why don't you think the market's giving you your just due on that? I mean, is it all technical? Is the market just looking as the LFOs have discussed here? Is it just the technical aspects of the company? Or is it -- the financials have come up. I'm a financial guy. I look at it, I say, these guys are doing a good job. He puts -- the owner puts capital in. They're reducing leverage. Not bad things to happen. And yet, the market's come yawning at that. Why do you think that's the case? And what do you think it's going to take to get them to focus on that? That's question one.

It's a good question, something that we certainly battle internally here. And unfortunately, I don't think that we have a complete understanding. We have a disagreement about that issue. We've now fortified the balance sheet. The core business is growing very well. The satellite business from a valuation perspective used to be an afterthought, I think, in the average investor's mind. And I think now what is a substantial run rate annual EBITDA that cannot be discounted the way that it has been in the past. So hopefully, we will continue to prove that the satellite businesses are growing and we'll be at EBITDA levels that are grossly in excess of where we are today. So hopefully, that trend will continue. I think we're doing the right things on that front. And next year, I think, is a big test as we roll out 2 major products, and hopefully that will further accelerate growth. But we do have a very good liquidity position right now. We are making substantial progress on the international front and certainly doing so on the domestic front as well. So we're firing on all cylinders right now. Why the market doesn't totally appreciate that or see it the way that we do? We're not sure. We recently did a substantial marketing round in New York for the capital raise and got to talk to a ton of new investors and existing investors. So I think we're telling the story and I think what's key for us is to continue to hit the milestones. For example, everyone had substantially discounted our ability to get any international approvals, and I think we're going to prove them wrong. Shortly, we'll announce the first full authority and hopefully that is the first of many. So we're going to continue to operate, continue to obtain international approvals and do what we can control. But we see that disconnect and unfortunately, I don't agree with it.

Yes. There seems to be a significant disconnect there. The other -- the last question is, last quarter, you mentioned that Allen & Company were on board. I don't know what investment bank [you expect there] working with you. Are they still there? Are they still working with you?

We have not disclosed the advisers that we are working with. There have been numerous rumors about who that may be, but we have confirmed that we are working with the advisers on the domestic spectrum front but we did not disclose their identities.

Well, I had it in my notes, Jay. Last quarter, we were told Allen & Company was working with you.

Again, we have never confirmed the name of the advisers nor do we plan to do so in the future.

And our next question comes from John Petrozzi with Muller Road Capital.

Just one follow-up. There was an article that came out several weeks ago after the disaster in Puerto Rico and I talked about that a little bit, but it linked you and Google together in terms of working collaboratively to help in the efforts down there. Was that in fact true? And if so, how did that go?

Yes, it was true. And we've worked with a number of other service providers as well. But we actually disclosed that directly. It wasn't just a rumor. And did a number of things with Google down there and are continuing to work with others to support continued connectivity. So that was something that was more than just a rumor, but was confirmed by us.

And that process is going well, I assume, be it that there is continued collaboration?

Yes. The need down there has been both extensive and extended and that continues today. Satellite backhaul is in high demand. Our total traffic over the area has increased significantly and continues to, and actually is not tailing off the way that we would've expected. The terrestrial infrastructure has not come back as fast as other precedents. So that continues in earnest today, and does so with Google.

I'm showing no additional questions.

Okay. So let me just tie a couple of things together here and make a closing remark or 2. It has been 11 months since Globalstar first received the approval from the FCC. So this time last year when we were having conversations with our investors, our EBITDA was much, much lower. We had, I think, skittishness by all parties about what was going to happen with the FCC process, disbelief that we would be able to execute on the international opportunity and certainly no clarity on where we ended up with the FCC; and therefore, what it implied for the changes in the marketplace. So here we are, 11 months later, we proved up the international. We're in dozens of places right now and we think that there will be more and more licenses emitting certainly over the next year that will implicate more pops than there are in the United States by a long shot. We've done tests with the spectrum based upon the approval from the FCC. We're entering into the 3GPP process and have begun that. We have tests with Nokia and we've been doing work with other chip vendors. In short, though the stock has not reacted as much as we would have hoped during that period of time, clearly, we have been knocking off the various assignments that we have given ourselves in order to be successful. And we'll continue to do this. As I said in my prepared remarks, we've invested a lot of money and a lot of time in Globalstar and these efforts, and the opportunity is much larger than even we would have thought a few years ago. So look forward to having everybody on the phone chart our progress with us during the next couple of years and hope to have many, many more successes to talk about quarter-by-quarter over the next few months. Thank you very much.

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