James Monroe III – Chairman, Chief Executive Officer
Fuad Ahmad – Senior Vice President, Chief Financial Officer
Thomas M. Colby – Chief Operating Officer
Anthony J. Navarra – President of Global Operations
James Cox – Private Investor
[Joel Miller – Marion Group]
Globalstar Inc. (GSAT) Q3 2008 Earnings Call November 10, 2008 5:00 PM ET
Good day ladies and gentlemen and welcome to the third quarter 2008 Globalstar Incorporated earnings conference call. My name is Melanie and I’ll be your coordinator today. (Operator Instructions) I would now like to turn the call over to Mr. Dean Hirasawa, Director of Public and Investor Relations. Please proceed.
Good afternoon everyone. Thank you for joining us for today’s conference call to discuss the results for Globalstar, Inc. for the quarter and nine months ended September 30, 2008.
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 safe harbor section of today’s press release and in Globalstar’s SEC filings including the quarterly report on Form 10-Q for the three months ended September 30, 2008 which is being filed today.
Both the press release and the conference call include discussions of certain non-GAAP financial measures as defined under SEC rules. We have provided a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure in the press release. Please note that the information in this call is accurate only as of the date of this live teleconference which is Monday, November 10, 2008.
Today’s press release containing certain financial information is available on the company’s website at www.Globalstar.com. Later this afternoon an audio recording of this conference call will be available via telephone dial-in and a webcast recording will also be made available on the company’s website.
Presenting this afternoon will be Mr. Jay Monroe, Chairman and CEO of Globalstar Inc.; Mr.
Thomas Colby, Chief Operating Officer; Mr. Fuad Ahmad, Senior Vice President and CFO; and Mr. Tony Navarra, President of Global Operations. All four gentlemen will be available following the prepared remarks to take questions. At this time I would like to turn the call over to Mr. Monroe.
James Monroe III
Thank you Dean and thanks for joining the call today for Globalstar’s quarterly earnings call. With just over 60 days to go before beginning the qualification testing of our initial second generation satellites and about 10 months to go before our scheduled first launch, we continue to make progress on many fronts.
As many of you know, earlier this year the FCC granted Globalstar expanded authority to use an aggregate of up to 20 megahertz of our LNS band spectrum or ancillary terrestrial component or ATC service in the United States. This enables us to partner with a number of wireless industry service providers for a broad range of new communication services to un-served or underserved customers.
And on October 31, the FCC issued an order and authorization modifying Globalstar’s authority to offer ATC services in the United States. In the order, the FCC stated, “This modification permits the use of WImax air interface protocol, permitting Globalstar and its spectrum lessee, Open Range Communications Inc., commence deployment of a broadband service consistent with a $267 million loan commitment from the Department of Agriculture’s Rural Development Utilities Program.”
Globalstar’s spectrum is to be used to deploy WImax services to over 500 rural American communities that currently do not have adequate access to terrestrial based broadband voice and data services, with the ability to expand the relationship over the next six years to an additional set of markets covering up to 50 million people or about 15% of the entire U.S. population. This modification paves the way for Globalstar to continue proceeding with implementation of the world’s very first ATC system agreement.
Since the ATC rules were first established by the FCC in early 2003, Globalstar has been working diligently to complete the necessary FCC authorities and to establish partnerships to utilize our ATC spectrum. We expect this agreement to provide significant and meaningful revenue impact to Globalstar over the duration of the partnership.
During the third quarter, there were many other Globalstar and SPOT operational highlights. And here to summarize those accomplishments is Tom Colby, Chief Operating Officer for Globalstar.
Thomas M. Colby
Thank you Jay. Before I begin I would like to introduce myself to this forum. Since joining Globalstar I have had a chance to meet many of our talented employees located here in California as well as at our operations around the world, all of which have helped grow this company into the MSS leader it is today.
I fully endeavor to use my experiences and expertise in advanced location based services, consumer electronics, wireless and Internet based technologies to help take Globalstar to new levels of success and prepare to maximize the potential of our next generation, constellation ground network and newly found consumer retail success.
I am pleased to announce that throughout the third quarter, Globalstar continued to grow as we added about 13,500 net subscribers during the quarter, about 80% more than the 7,600 subs added during the same quarter one year ago. By adding significant numbers of new Simplex data customers and continuing to substantially retain our core customer base, Globalstar completed the month of September with almost 330,000 subscribers. Our CFO will provide more financial results in a few minutes.
As Jay has done in the past, let’s continue to update you on the four areas which are key to Globalstar’s long term business success. Because of the significant decision made by the FCC at the end of October, Jay began by discussing our ATC Spectrum opportunity and, in particular, our opportunity with Open Range. We expect our agreement with Open Range will also establish a framework for how Spectrum may be used more efficiently to the benefit of Globalstar, our partners and our customers here and in other markets.
There are approximately 400 WImax networks in more than 130 countries and we expect this agreement to serve as a model for our discussions with other potential WImax partners looking to replicate the rural utility of our satellite capacity. Globalstar plans to continue and initiate domestic and international discussions with other potential solution partners to pursue the development of a variety of ATC and ATC type wireless solutions.
A second area of quarterly focus relates to our Simplex data and SPOT products. Throughout the quarter, Globalstar continued to build the consumer retail acceptance of the SPOT Satellite Messenger products and services. Recognition by the Wall Street Journal for introducing the most innovative consumer electronics product in 2008 emphasized our consumer retail market potential and further differentiated us from our MSS competitors.
During the quarter, SPOT was also awarded Field and Stream Magazine’s Best of the Best Award in the Hunting Technology category for 2008, making it one of the most recognized new products in the outdoor enthusiast consumer marketplace. As expected, we continued to grow our retail distribution of SPOT by expanding its availability to over 6,200 retail locations by the end of the quarter. I am pleased to announce that number is about to grow as we have recently signed an agreement with Costco to distribute the SPOT Satellite Messenger at their membership warehouse locations across the United States.
To this date we have shipped or received orders to ship more than 100,000 SPOT Satellite Messenger units to distributors around the world. In addition to our SPOT consumers, many of our Globalstar commercial customers also use our Simplex Data Network for asset or personal tracking, fleet management and data monitoring applications. The Globalstar Simplex Data Network continues to provide high quality and extremely reliable messaging for our customers within the primary Simplex and SPOT coverage area.
During the quarter, Renewable Energy Systems Americas Inc., a leader in the development and construction of renewable wind energy products, signed an agreement to transmit wind measurement and other remote monitoring data from prospective wind farm locations using the Globalstar Simplex Data Network and an integrated Simplex Data Solution.
Globalstar also recently certified Guardian Mobility’s [Seatrack] GPS tracking device that utilizes the Globalstar Simplex network for marine asset recovery applications. We continue to work with several Simplex Data integrators like Guardian and we expect our integrators will continue to develop and introduce additional Simplex Data Solutions to the market.
Third, let’s discuss our latest international initiatives. Globalstar distributes products in over 120 countries around the world. During the quarter we continued the strategy of expanding the geographical area to which we can market our products. The purchase of the Brazilian service provider announced earlier this year paved the way for us to expand our Simplex and Duplex Data coverage in South America.
During the third quarter we began preparations for launching sales of the SPOT Satellite Messenger in that marketplace of close to 190 million consumers. I recently visited the operations in Brazil and found market potential due to the limited, rural communications infrastructure. Globalstar’s Simplex is already being used for a variety of heavy equipment and mobile fleet monitoring applications, plus there is potential to partner with other providers interested in launching wireless ATC type complementary services using our Satellite’s Spectrum.
In Africa we continue on track and on schedule with the development and construction of the new gateway being built in Nigeria for our independent gateway operator. In September, the newly constructed Singapore gateway, operated by Singapore Telecommunications or SINGTEL became operational. This new gateway now serves significant parts of Southeast Asia with our highly reliable Simplex Data coverage.
We’ve also begun planning for up to two potential gateway sites in India that would be used to provide expanded Western Asia satellite coverage. In the longer term, we hope to establish contiguous coverage throughout Asia, the Middle East and in Africa.
Fourth and finally, let’s discuss the status of our next generation ground network and the manufacture and launch of our second generation Satellite Constellation. In late August we announced that our satellite manufacturer, Thales Alenia Space had begun production assembly and testing of the first of our second generation satellites. Tony will provide you with further details of the significance of this event plus other updates concerning our space and satellite operations in a few minutes.
Earlier this year we contracted with Hughes Network Systems to provide Globalstar with the necessary radio access network upgrades needed in our gateways. In October we signed an agreement with Ericsson for the development, implementation and maintenance of a ground interface or core network system that will also be installed at Globalstar’s satellite gateway ground stations. These upgrades, which match up with the new satellites, will enable us to offer higher data rates in our second generation system.
The all Internet protocol, IP and IMS or Internet media services based core network system is designed to support 3G and 4G services and will link the updated Globalstar radio access network to the publicly switched telephone network or PSTN and the Internet. Recognizing the potential for developing integrated solutions with global handset manufacturers, our contract with Hughes Network Systems will also provide Globalstar with the design of a new, low cost satellite interface chip sets.
These chip sets will be used to power our new, next generation voice and data products but they may also be used to provide other device manufacturers with ubiquitous satellite capabilities. Ten years ago, satellite handsets were bulky and expensive. This revolutionary new chip set will be available for a fraction of the cost previously associated with earlier chip sets and will add the functionality without the substantial size and weight increase associated with earlier satellite terminal form factors.
To enable this multi-mode technology, we will be licensing the chip sets at a nominal cost to anyone who would like to embed inexpensive satellite connectivity in one of their devices. This creates a convergence at the device level of both wireless and satellite voice and data capabilities. And we expect this to make satellite access available for literally a fraction of the total cost integrators would have faced just a few years ago. We also fully expect to be able to offer the world’s most cost effective satellite only handsets to our commercial and industrial markets based on our new Hughes based architecture.
Now I will turn the call over to our Chief Financial Officer, Fuad Ahmad who will talk about our financials.
Thank you Tom. For the third quarter of 2008 we again demonstrated strong overall customer growth, sequentially stable revenues and low retail churn rate, hence confirming our core business thesis of growing our Simplex customer base while maintaining our Duplex subscribers as we transition into our second generation Constellation.
We ended the third quarter of 2008 with 329,388 total subscribers on our system, an increase of 13,477 from June 30, 2008 and 45,262 from December 31, 2007. For the three months ended September 30, 2008 we had $16.2 million of service revenue compared to $16.7 million for the second quarter of 2008. Year-to-date service revenue was $48.8 million. For the three months ended September 30, 2008 equipment revenue was $6.4 million compared to $6.3 million for the second quarter of 2008. Year-to-date equipment revenue was $18.8 million.
Total operating expenses for the quarter ended September 30, 2008 were $40 million compared to $35.1 million for the second quarter of 2008. This growth in operating expenses was due primarily to three main reasons; one, a $1 million expense for the second generation development costs; two, a $2 million non-cash charge related to accrual of certain contingencies and finally $700,000 of additional depreciation and amortization expense for the quarter.
Operating expenses for the nine months ended September 30, 2008 were $108.7 million. For the quarter ended September 30, 2008 we recorded adjusted EBITDA loss of $4.9 million compared to an adjusted EBITDA loss of $1.3 million for the second quarter of 2008. This decline in adjusted EBITDA is primarily related to the items discussed above. Adjusted EBITDA loss for the nine months ended September 30 was $8.6 million.
We recorded retail ARPU of $35.32 for the quarter ended September 30, 2008 compared to $38.57 for the second quarter of 2008. Year-to-date retail ARPU was $37.34. Our monthly churn rate for the first nine months of 2008 was 1.6%. Both of these core operating metrics were significantly above our expectations.
Cash capital expenditures related to the construction of our second generation system for the third quarter of 2008 were approximately $67.8 million, exclusive of internal costs. Year-to-date cash capital expenditures were approximately $205.7 million, also exclusive of internal costs. We ended the third quarter 2008 with $100.7 million of available liquidity. With that, I turn it over to Tony.
Anthony J. Navarra
Thank you Fuad. With the first of our second generation spacecraft due to be delivered in June of next year, our satellite manufacturer Thales Alenia Space began production, assembly, integration and testing of the first Globalstar second generation satellites during the third quarter. In August Globalstar, Thales and Arianespace company officials presented the latest updates to members of the media and the investment community, answered questions and provided opportunity for those on hand to tour the Thales facility to view our first production satellites.
The investor event and manufacturing tour demonstrated that we’re on track to meet our second generation launch schedule. Those of you on the call who took the opportunity to attend the August 26th event saw for yourselves that we’re doing exactly what we said we would do and exactly doing it on time and on budget. We want to thank Thales Alenia Space, Arianespace and all their subcontractors for helping us meet our timetable to deploy Globalstar next generation network.
In October, in order to facilitate our first satellite deliveries, a Globalstar technical team working with Thales engineers complete a major satellite system manufacturing milestone known as the system critical design review or Satellite System CDR. By completing this process, all final design parameters have now been approved by Globalstar and the final assembly, integration and test procedures, also known as the final AIT process for the first of our flight model satellites can now commence at the Thales manufacturing facility in Rome.
This process will begin once the satellites have been shipped to Rome beginning in December of this year. With these final preparations in place, we expect the first of our satellites will be delivered from Rome beginning in June of next year. We expect four launches will all be conducted from either Karoo in French Guiana or Baikonur Kazakhstan. Our new satellites have a 15 year design life and are expected to secure our space segment at least through 2025 at a fraction of the costs of Globalstar’s original Constellation.
They will be used to support Globalstar’s next generation of advanced mobile satellite voice and data services and will also facilitate a return of our first generation Duplex voice and data services back to our robust levels of performance our customers enjoyed prior to 2007. Globalstar first generation Constellation of 48 operational satellites continues to perform with operating parameters designed to maximize the quality of our services to our worldwide subscribers.
Our Simplex and SPOT Satellite Messenger customers continue to receive a greater than 98% message reliability with no interruption or degradations in service. Our two-way voice and data Duplex customers continue to utilize the tools we have put in place to help manage the transition to the deployment of our second generation Constellation. Our Duplex services are currently being optimized for subscribers through the use of the Optimum Satellite Availability Tool or OSAT which continues to provide our customers with a greater than 95% connectivity probability when connected at selected hours.
Our customers are also accessing our recently expanded and easier to use version of OSAT which provides them with a 96-hour satellite performance forecast for any given location. Our Duplex and voice services availability improved with the addition of the eight new first generation satellites launched in May and October of last year. And during the third quarter, the call completion performance based on our call detail records remained steady.
Because of the increased use of OSAT and other tools such as Duplex data store and forward capability, the overall voice and Duplex data minute usage continues to increase throughout the third quarter. The successful use of these tools also positively contributed to the lower customer churn rate that Fuad referred to earlier in the call.
Updating you on our Soyuz launch vehicle progress, the launch dispenser preliminary designed review or PDR is now complete. Globalstar and Arianespace personnel completed a dispenser PDR and launch operations meeting during the third quarter. Launch support and launch profile for both Karoo, French Guiana and Baikonur Kazakhstan are now in the planning processes. Staffing is being planned to support a complete, multi-launch vehicle program with the first of six Globalstar second generation satellites expected as early as September of next year.
With that, let me turn it back to Jay for some closing comments.
James Monroe III
Thanks Tony. Since we last reported to you, markets around the world have been negatively and significantly impacted by the global economic crisis. Many issues influence our stock but the events of the past six weeks have certainly had an adverse affect on its price, which has dropped to disappointing levels. We continue to feel that our stock at these levels does not fairly represent the intrinsic value of the company. We’d also like to remind you that we continue to make significant business advances as we approach the launch of our second generation products and services.
For instance, in just over 60 days we’re scheduled to begin the final qualification testing of the first of our second gen satellites, putting us in a position to deploy the second generation Constellation in about 10 months. We’ve been granted modified ATC Spectrum authority by the
FCC to promote WImax services with our wireless partner and we can potentially use our Spectrum to partner with other wireless service providers.
And we’ve been recognized by the Wall Street Journal for introducing the year’s Most Innovative Consumer Electronics Product, the SPOT Satellite Messenger. And we’ll continue to develop other SPOT and Simplex integrated products. We continue to expand to markets where we can distribute SPOT and Simplex such as Southeast Asia and we’ll continue to construct and consider potential new gateways around the world.
And we’ve just signed an agreement with Ericsson for the core network upgrades needed to launch our second generation of advanced, all IP satellite voice and data services. With reduced monthly churn, and almost 330,000 subscribers, we retain the largest customer base of any MSS provider of satellite voice and data services.
Yes, with the current economic environment we understand that over the upcoming months we’ll continue to face some significant challenges. But as I’ve said before, we have a group of brilliant and resourceful employees and we are committed to unlocking our potential as we take Globalstar into the next decade.
Thank you again for joining us today and we look forward to speaking with you again in about four months.
Thank you Jay. That concludes the prepared portion of the presentation. We will now take the opportunity to answer questions. Operator, can you please proceed with the first question?
Yes sir. (Operator Instructions) Your first question comes from James Cox – Private Investor.
James Cox – Private Investor
Hi. My name is Jim Cox and I’m primarily interested in the success of Globalstar, having been a customer since the first quarter of 1999. And I have a SPOT device and I also have the phone. And what I’m interested in knowing is how there’s going to be sufficient cash to fully deploy the second generation of satellites and is this really going to be done with borrowing in a very adverse environment? Or is it going to be done with a stocks offering? Is it going to be massively dilutive of what we’ve already sustained?
And I guess how badly has Thermo been impacted by all of this and are they willing to add additional cash or are they going to, as bond holders ultimately have control over GSAT if no additional cash can be raised? So I’m just interested in its long term success having lost along with my friends several million dollars over the last ten years on this venture. So I really want to use the products and I want it to be a success and I’m primarily interested in how the funding of this second generation is going to go forward. Thank you.
Hi. This is Fuad. Let me address the question and Jay can answer the second part as it relates to Thermo. Right now you know we are all aware of the adverse market conditions and the difficulties that companies are having to access cash, other companies. While we, the company itself, has $100 million of available liquidity today that it can use to continue to fund its CapEx, the amount of funding required to continue to execute on our CapEx is sufficient, we believe, through the second half of the second quarter of 2009.
The company is vigilant. We are looking at some various alternatives to raise additional capital. That option is available to the company, should the company decide to execute on one. At this point we’d like the capital markets to be improved until we execute on a funding plan. So right now I think we feel we’re comfortable where we stand in terms of our liquidity. I’ll ask Jay to answer the second part of your question.
James Monroe III
Okay. I’d be glad to. And I’d like Tony also to address a third part of it, which would be the relationship with all of our vendors.
Thermo as you know has been very supportive of this company and we would anticipate continuing in that role as we have in the past. As every other shareholder has been hurt by the fall in the stock price and the basic problems in the overall marketplace, so has Thermo. It has not impacted our own liquidity in a way that would adversely affect our ability to do whatever we deem is correct at Globalstar. But in Globalstar itself, clearly the value of our stake has shrunk dramatically.
But you know we’ve been in this a long time. We were there when Globalstar came out of bankruptcy. We have funded it, not always with a smile on our face because it’s been tough sometimes. On the other hand, we’re now closing in on the launch of the second generation Constellation and once that occurs, we’re very, very comfortable with what the company’s prospects are. I think that’s about as far as I can go at this moment. Tony?
Anthony J. Navarra
Jim, first of all we want to say thank you for being a good customer of ours for all these years. We have a unique relationship with both Thales and Arianespace and some of their key vendors in that we work closely over all these years, for in fact the last 15 years we’ve worked with both Thales and all the technologies necessary to build our first and second generation satellites.
And as you may have remembered, we’ve launched eight times with Arianespace using the Soyuz. So because of this longstanding relationship with both of those organizations, we find that we’re very flexible in the different contract terms and we have the ability to work on different payment schedules against the major milestones of the satellite deliveries and the launch program itself.
So, you know, again because of this longstanding relationship we’re very comfortable that as we get into the next two or even three quarters we’ll have the ability to raise the funding necessary to go forward.
James Cox – Private Investor
Well thank you very much.
Your next question comes from [Joel Miller – Marion Group].
Joel Miller – Marion Group
Got a quick question regarding the FCC. I think that you guys must be ecstatic that at the change in administration so that as things go forward that you’ll probably get a lot better response from your needs. And in that vein, there was a telecom conference call on the outlook for the FCC. And they mentioned the likelihood that going into next year with the combination of building broadband and jobs program that there might be an acceleration of the build out.
And I’m not sure whether you’ve actually heard of this, but could you comment on the likelihood of maybe Open Range if this comes to truth? You know, how Open Range might be able to accelerate their program?
James Monroe III
Joel, I’ll be glad to. Actually I’ll comment on Open Range and Tony can comment on the status of the FCC. As far as Open Range goes, you know, there are a couple of steps that they still have to go through in order to close their final transaction that brings in their equity and matches it with their debt. But that’s the RUS Department of Agriculture debt. But they are proceeding. All of us inside Globalstar have conversations with them every single day. I have multiples every day as they push to that final conclusion.
I know it’s their intention to go just as rapidly as they can. I hadn’t heard the specifics of what you just raised but I know they have been waiting patiently and working hard in order to get to a spot that they could begin the roll out of WImax in these rural communities.
You also know from all the discussions we’ve had in the past that as a result of these options, they have the ability go just about as fast as they want to. And so if they came to us tomorrow morning and said we don’t want to build under 12 million pops, we want to build under
50 million pops, they have the right to do that immediately in the contract with us. And so we are very hopeful that your assessment of that situation is right and they grow like that.
Tony, can you take a little bit about the FCC maybe with Joel?
Anthony J. Navarra
Absolutely Jay. Joel, good to hear your voice again. First of all, we’ve been working closely with the FCC and specifically the NTIA to manage the Spectrum for both Globalstar and with Open Range. And in the last month or so we have been very successful in achieving the power levels and the frequency at S-band to allow Open Range to grow their system in a very open and flexible manner. And we’ve been successful in having good, good relationships with both the International Bureau and the Wireless Bureau at the FCC.
So you know we’ve very pleased with both the relationship and the ability to have them start their service as soon as possible with both the wireless hand sets as well as the base stations, because as you know the base stations have to be able to communicate with relatively low power in the rural areas of America.
And gentlemen I show no further questions at this time. I’d like to turn the call back over to management for any closing remarks. Please proceed.
Thank you operator. With that we’ll bring the conference call to an end. Thank you again for joining us and please be reminded that later this afternoon an audio recording of the conference call will become available via telephone dial in. The webcast recording will also be available on the Globalstar website. Thank you and good afternoon.
Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation. You may disconnect. Have a wonderful day.
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