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Globalstar, Inc. (NYSEMKT:GSAT)

Q3 2013 Earnings Conference Call

November 13, 2013 05:00 PM ET

Executives

Kathryn Singer - IR

Jay Monroe - Chairman and CEO

Rebecca Clary - Chief Accounting Officer and Corporate Controller

Tim Taylor - Vice President of Finance

Analysts

Jim McIlree - Chardan Capital

Vikas Tandon - Bastogne Capital

Michael Rindos - Midtown Partners

Operator

Welcome to the Q3 2013 Globalstar Inc. Earnings Conference Call. My name is Robert and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Kathryn Singer. Ms. Singer, you may begin.

Kathryn Singer

Thank you, operator. Good afternoon, everyone. Thank you for joining us for today’s conference call to discuss Globalstar’s three months results for the period ended September 30, 2013.

Before we begin, please note the following. This call may contain forward-looking statements within the meaning of federal securities laws. Factors that could cause results to differ materially are described in the Safe Harbor section of 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, Wednesday, November 13, 2013. The third quarter 2013 press release that was issued this afternoon, which contains 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 being 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 Tim Taylor, Vice President of Finance.

Now it's my pleasure to turn the call over to Jay Monroe.

Jay Monroe

Good afternoon, everyone and thank you for joining us. In the third quarter and in the weeks following the close of the quarter Globalstar made tremendous progress with regard to a host of operational, financial and regulatory efforts. Over the past year we have consistently communicated that the company is at an inflection point. In this quarter we will able to produce material results along this path. The past few months have arguably been the most productive in the company’s history as we have been able to announce the SEC’s release of our notice of proposed rulemaking, fully restore the satellite network in late August, complete our senior debt facility amendment process and secure Thermo’s $85 million backstop.

Thermo has continued to owner its promise to support the company and to-date has invested over $550 million including $51 million in connection with the recent round of financings. The balance sheet activities provide the company the required runway to build the business and are structured to allow us the flexibility to make the appropriate long term operating and network related investments.

I am pleased to report that although only one month in Q3 had fully restored duplex service all major Duplex data points including ARPU service revenue, equipment revenues and subscriber editions are rebounding and strong support for our 2014 and beyond financial performance. As compared to the year ago quarter Duplex ARPU is up 29% well service and equipment revenue increased 25% and 80% respectively. Importantly as our competitive offering has improved we are beginning to win new subscribers with Duplex gross adds increasing 129% to 4,600 the highest quarterly level in five years.

It’s been a long time since Globalstar’s witnessed such success and I want to give special thanks to our investor base that has believed in Globalstar’s potential and stuck with us through an extended turnaround period. We have weathered a global financial crisis, network degradation, liquidity challenges, significant constellation replenishment delays and related legal disputes and sitting here today, we have navigated our way through all of these changes. Today, we have emerged as a stronger and more resilient company, we have in place now an attractive debt facility, a committed equity financing, a fully restored state-of-the-art satellite network, a growing revenue base across the diverse product suite, an expansive consumer distribution network, a host of newly introduced and pipeline products and of course just two weeks ago, the initiation of a spectrum proceeding that will allow us to deliver innovative terrestrial mobile broadband services.

We have been unwavering in the phase of great obstacles and our constant belief in the underlying fundamentals of the business has set the foundation for the opportunities before us today.

Before I expand on these issues, I will turn the call over to Rebecca Clary to summarize the Q3 financial performance. Rebecca?

Rebecca Clary

Thank you, Jay, and good afternoon, everyone. As shown on slide three, total revenue was $22.5 million in the third quarter of 2013, compared to $20.5 million in the third quarter of 2012. This 10% increase was driven by growth in both service and equipment revenue. Service revenue increased $1.7 million to $17 million during the third quarter of 2013, and equipment revenue decreased $0.3 million to $5.5 million over the same period. Our Duplex business continued to improve substantially, as we work to our fully deployed constellation. We are adjusting in pricing plans to be concurrent with the improved network performance and are increasing the base by garnering new subscriber activations in traditional markets, while expanding our Duplex service offering into our consumer distribution network.

While service revenue from all of our core lines of business improved quarter-over-quarter from 2012, almost 75% of the increase was driven by our Duplex business. The increase in Duplex service revenue resulted from a 29% increase in ARPU which grew from $19 in the third quarter of 2012 to over $24 in the third quarter of 2013. Driving this improvement over the past 12 months were the conversions of over 20,000 loyal subscribers to higher rate plan, the addition of nearly 14,000 new subscribers at rate plans higher than our current ARPU levels and churn of low revenue generating subscribers as we execute a win back campaign to actively encourage these subscribers to transition to our primary service plans. The improving quality of our subscriber base is being driven by the expansion of network reliability, which has allowed us to regain subscribers more effectively and also rate plans that are aligned with the expanded coverage.

The increases in SPOT and Simplex service revenue were driven by growth in our subscriber base for these two segments due to the volume of equipment sales during the previous 12 months. Subscriber equipment sales were $5.5 million for the third quarter of 2013 compared to $5.2 million for the third quarter of 2012. Duplex equipment revenue increased $0.09 million or 80% while SPOT and Simplex revenue decreased by $0.1 million and $0.06 million respectively as compared to the third quarter of 2012. The return of our Duplex business has been seen clearly through the increase in the number of hotels. Total unit sales including both Globalstar and SPOT handsets increased over 70% from the third quarter of 2012. The SPOT Global Phone made a meaningful impact on these results representing over 40% of total phones sold during the quarter.

Simplex equipment revenue declined from the third quarter of 2012 due to the mix of products sold in the respective quarters despite an overall increase in the total number of units sold. Simplex demand is predicated on our customers’ specific commercial project needs and timing. This demand resulted in a larger quantity of higher margin products sold in the third quarter of 2012 and the larger quantity of lower margin products sold in the third quarter of 2013.

For our SPOT line of business, market demand for our product has not levered during 2013. SPOT sales during the prior two quarters were impacted by delay in the launch of SPOT Gen 3 due a longer than normal certification process and diligent quality review control performance prior to the product’s release.

However, launch of this product has [met] high anticipation among our retailers around the world. We initiated the shipment of this product during the third quarter. And as the demand has exceeded available supply, we currently have a large back order that will be reduced throughout the fourth quarter. We expect SPOT equipment sales to continue to rebound with the launch of a new consumer asset tracking device, a product that Jay will expand on a little later.

Globalstar reported adjusted EBITDA of $2.5 million for the three months ended September 30, 2013, a decline of $0.6 million from the third quarter of 2012. This decrease was driven by $2.6 million increase in operating expenses excluding EBITDA adjustments offset partially by a $2 million increase in total revenue as previously discussed.

The continued improvement in our duplex business largely drove the increase in total revenue contributing $2.1 million to the overall increase.

Higher operating expenses excluding EBITDA adjustments were due primarily to increased expenditures to support our sell-to-marketing initiative around the rollout of new products and services and positioning the company to fully leverage the consumer constellations. The company incurred an incremental $1.6 million related to these efforts in the third quarter of 2013 as compared to the third quarter of 2012.

During the third quarter we also made judicious investments to repair and maintain our gateway infrastructure in anticipation of increased duplex demand in certain regions around the world. The substantial increase in net loss during the third quarter of 2013 from the third quarter of 2012 was driven by multiple non-cash items including an increase in derivative loss of $81 million and a $64 million loss on the extinguishment of debt.

The derivative loss recorded during the third quarter of 2013 was driven by the significant increase in the company’s stock price from June 30, 2013 to September 30, 2013. The loss on extinguishment of debt was record in connection with the amendment of the company’s 2009 subordinated loan agreement with Thermo which was completed in July 2013.

The loss was driven by the value of the conversion option and the amended loan agreement which was impacted by various assumptions and input used in the valuation model including the company’s stock price volatility and paying [kind] interest payments over the term of the loan. Other non-cash items including higher interest and depreciation expense also continue to contribute to the increase in net loss.

And now an update on the company’s liquidity position, we ended the third quarter with an unrestricted cash balance of $6.6 million, $30 million available to be drawn under committed equity line with Terrapin and $24.7 million available under the funding back stock from Thermo.

We also have $37.9 million in a debt service reserve account which is restricted to make payments with the final principal and interest amounts due under the COFACE facility. In October, we drew approximately $6 million from the equity line of Terrapin. The remaining amount is available to us for the 24 month period.

As of September 30, 2013 Thermo has contributed a $51.5 million under its $85 million financial commitment. This amount includes $25 million received upon closing of the notes exchanged in May, $6 million received upon closing at a facility in July and $20.5 million to maintain the company’s minimum liquidity covenants of $4 million as defined in our facility agreement.

Under the terms of the consent agreement, Thermo has committed an additional $33.5 million through the end of 2014, which can be received dollar-for-dollar by other funding sources. As of September 30th, the company has received proceeds from the issuance of shares in the amount of $4.4 million relating to the termination of its 2008 share lending agreement and another $4.4 million from warrant exercises.

Over the past several months we have made significant strives to improve our balance sheet. We successfully closed the exchange of the final three quarters in May and the amendment of the COFACE facility in August. As a result of these transactions we removed approximately $656 million from short-term debt when compared to the December 31, 2012 balance sheet.

And last week we converted $24 million, the remaining principal amount outstanding from our of 5% convertible senior notes into equity. This conversion resulted from our stock price closing for 30 consecutive trading days at about 200% of the $0.50 conversion price underlying those notes.

Looking forward, we are confident about our financial outlook considering the trends we've been seeing and increasing duplex ARPU, improving phone sales, rising minutes of use and market reaction to new products. At this point, our primary focus is on the execution of our business plan.

The investments made in our enhanced sales and marketing efforts and in our gateway infrastructure are only some examples of what we are doing as a company to drive near and long-term sales and position the company for further growth over the coming quarters and years.

I will now turn the call back over to Jay.

Jay Monroe

Thanks Rebecca. Operationally over the past several years, while awaiting the return of healthy two-way service, we focused on the build out of our SPOT consumer business and related retail distribution network. With the limited two-way service offering, beginning in 2007, we significantly lowered pricing and year-after-year we experienced negative net ads to our duplex subscriber base. While price reductions allow the company to retain as many as subs as possible, lower ARPU on a smaller subscriber base reduced our revenue and our cash flow.

However, after years of decline, I'm pleased to report that these declines are now a thing of the past. As outlined earlier, all of the principal data points of our duplex business are experiencing increases that have exceeded our expectations so quickly after satellite service was restored. Key vertical market business is returning in sectors such as oil and gas, mining, forestry and one-by-one we are winning customers back.

The recent rollout of the SPOT global phone, while only in the market for a few months has received a very positive initial reception that includes not only qualitatively positive reviews, but it's also producing strong incremental equipment revenue and gross ads by leveraging our existing consumer network in the brand equity in the SPOT business.

When choosing a satellite service provider, potential subscribers analyze three primary factors; price, voice quality and network performance. Although we have the industry’s most attractive pricing and voice quality that is unquestionably superior to the competition, for only a few weeks have we been able to round up the three pillars this was fully restored network coverage.

As I mentioned at the outset, the subscriber base has responded well to the service improvement as ARPU and minutes of use have increased 29% and 23% respectively for the third quarter versus the prior year period. These two metrics demonstrate that our historic subs are using their phones more and paying ARPUs more commensurate with the improved service.

However and likely a more important, duplex equipment revenue has increased 80%, while gross additions have more than doubled. We view these two metrics as the best leading indicators of future growth since subs are once again choosing Globalstar due to these inherent and sustainable competitive advantages.

Taking a step back and analyzing the opportunity in front of us with the new constellation, we frame the MSS market opportunity in three areas; first, providing connectivity to more than 2 billion people who live work or play outside of cellular service, second, providing redundant telecommunication systems in the event of manmade or natural disasters such as 9/11 and Katrina, third, as an alternative to high cost roaming and cellular tracking services. As such we have focused our product development activities around the tenant that our ability to penetrate deeper and deeper into these three areas are primarily a factor of lowering end user pricing, reducing product form factor, increasing functionality and utility. Over the coming quarters, growth will be driven by a combination of initiatives, including the introduction of new products, increased market share in our core historic markets, increasing ARPU and the expansion into new geographical markets.

Regarding this last point, during the turnaround period, we acquired and constructed several ground network assets in markets including South America, Asia and Africa. Until now we have chosen to hold significant investment in these territories as we awaited service restoration.

These areas are now becoming principal areas of focus for our sales and marketing initiatives. We are also looking to restore service in countries with gateways already in place, including Saudi Arabia, South Africa, and China. And we’ll restart regulatory proceedings either independently or with in-country partners to establish service there.

While the current and historic Globalstar revenue base has been primarily North American, as we focus on and build out these new markets and expand our footprint, we expect a much more meaningful international revenue contribution in coming years.

Let’s move to slide six to get an update on our product roll-outs. R&D has been a core focus for the company with the goal of broadening the global relevance of mobile satellite services into untapped consumer markets as well as commercial markets.

This Spring, we introduced the SPOT Global Phone targeting the mass retail market and leveraging the significant consumer distribution channel and strong customer loyalty we have developed for SPOT product. We expect the Global Phone to greatly expand the addressable market for satellite voice services by targeting the traditionally unserved retail consumer that has never been a purchaser of satellite products of any kind.

As mentioned earlier, the initial indications of the Global Phone success are strong, it accounts for a healthy percentage of subscriber additions in this quarter. These are consumer adds at retailers such as REI and Cabela's, Bass Pro and Sportsman's Warehouse and West Marine and they are truly incremental and independent from our core vertical market distribution channels. We believe cannibalization between these two channels will be de minimis.

Existing product innovation and evolution remain a focus as evidenced by the release of SPOT Gen3 this summer. Gen3 is smaller, offers enhanced tracking feature, has twice the battery life of previous SPOT devices and provides increased equipment margin to the company, shipped to subscribers in quantity only in the last week of Q3 after prolonged certification process. Retailer and consumer demand has been so strong that we are currently sold out of inventory and have back orders which will be filled later this quarter.

In a completely new product segment for the satellite industry, we are very proud to announce this afternoon that tomorrow we will release the next iteration of the SPOT family the all new SPOT Trace. This is both an anti-theft and asset tracking device sold to consumer retailers and designed to trace the path of anything, anywhere, anytime including cars both ATVs, motorcycles or practically any other personal asset.

Commercial satellite asset tracking devices have been in existence for years, but before today a low cost, high utility device was unavailable for consumer assets, before today physically large satellite tracking devices were also prohibitively expensive unless you are tracking high value commercial assets. With SPOT Trace, consumers will now have a small and durable virtually [peel] and stick device which provides reliable mobile connectivity at a retail price of under $100.

At the core of the device is a newly developed and tiny satellite chipset which allows the company to manufacture SPOT Trace and all future SPOT derivative devices inexpensively while maintaining high product quality and healthy equipment margins.

In the commercial end to end market we will soon be releasing the STX3 enabling module. This latest update to our core M2M solution is a smaller than a quarter with numerous operational enhancements. This module is also easier to integrate by VARs and [films] into hybrid cellular and satellite solutions and is central to our growing relationship with partner Worldcom.

Together with Worldcom and Inmarsat, historically competitors of ours, we are collaborating on the creation of a new technical standards and the certification process for the M2M industry putting upto 4 [mils] of data transport in a single device. Worldcom in particular is a trusted partner and already one of our largest parts and we look forward to growing this partnership while further developing our relationship with Inmarsat.

A new family of modems using the standard will assure that all customers can use a single protocol to address any of their one way or two way communications needs. In the quarters ahead we will also release a universal maritime device or markets including the Caribbean, Asia, Central America as well as SPOT Gen3 Bluetooth, which combines the functionality of the new SPOT Gen3 together with Bluetooth-enabled smartphone pairing for additional user text messaging functionality.

Turning to slide seven, early this month the FCC voted unanimously to release proposed new rules to grant Globalstar the ability to offer terrestrial mobile broadband services. This is not only a tremendously exciting event for all of us here but powerful in its implications to our business. We held a conference call last week to explain these rules in detail, which were shown here on slide seven. And with over 500 participants, it was extremely well attended.

Today I'll note some of the macro trends in the mobile broadband industry which help explain why we expect to play a significant role in providing services to help support growing spectrum supply constraints.

The cornerstone of our FCC petition was a unique 22 megahertz Wi-Fi like service that we term TLPS. This is meant to help address the nation's explosive growth in Wi-Fi usage. The existing 2.4 gigahertz Wi-Fi spectrum which (inaudible) Globalstar is handling the majority of all mobile originated data and in many areas of the country this spectrum is at or close to exhaustion.

Acute issues already exist today and given the ubiquity and exponential growth in the sheer number of Wi-Fi enabled devices, the continued developments in wireless technology and increasing user data demands, this will all lead to further exhaustion. With the proliferation of data incentive apps and growing demand for mobile video, users are becoming more and more relying upon Wi-Fi. In fact, it's estimated that data consumption increases by a factor of 4 when on Wi-Fi versus the cellular network.

With final authority to offer TLPS, Globalstar could open up and manage 22 megahertz of spectrum adding no less than one-third to the Wi-Fi spectrum inventory and providing the only near-term solution for what the FCC refers to as the Wi-Fi traffic jam.

Presently, all operators of network infrastructure are trying to determine how to better integrate Wi-Fi into their network architectures and are introducing service pricing plans that account for network constraints.

Companies have recently announced plans to deploy millions of Wi-Fi access points throughout the country, offering near seamless authentication functionality. Any wireless carrier, cable company or technology company that can offer a superior mobile broadband experience such as the experience delivered through TLPS will be rewarded with increased growth, improved competitive positioning, improved customer satisfaction and reduced subscriber churn.

The FCC’s proposed rules provide Globalstar with maximum flexibility in how, when, where and with whom the company can decide to offer these mobile broadband services. For instance, the absence of any specific build-out requirement is incredibly beneficial to us and to potential partners. Further, by leveraging existing Wi-Fi infrastructure the very nature of a network like this type allows for a build-out cost that is a tiny fraction of the price of traditional cellular build-outs.

TLPS offers both range and capacity characteristics that are multiples of traditional Wi-Fi which after the NPRM process is concluded will allow Globalstar and its partners to quickly and very inexpensively roll-out service.

We look forward to completing the rulemaking process and continue to work with all stakeholders including the operators of services over adjacent unlicensed spectrum. Ultimately, next year we hope to be able to roll out a Globalstar-based terrestrial solution to provide a unique and wholly unreplicable opportunity to customers.

With that, we conclude the prepared remarks. Operator, would you please give instructions for the Q&A?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Jim McIlree from Chardan Capital. Please go ahead.

Jim McIlree - Chardan Capital

The cost of service has increased fairly substantially over the past fourth quarters. Can you point to why that is and when you think it will level off?

Rebecca Clary

Sure, Jim. So we’ve seen a couple of things going on in cost of services. One is gateway work that we referenced on the call and just repairs and maintenance needed as some of different gateways around the world, just more strategically trying to expand the market and then we’re also seeing capitalized salaries go down. So as our satellites have been placed into service the ability to capitalize the salaries also decreases, so that’s an increase in expense.

Jim McIlree - Chardan Capital

And so does that imply that it levels off soon? How much longer does the gateway work continue, because there seems like the capitalized salary if you should sort of worn off by now right?

Rebecca Clary

Right, that's correct. And the gateway work was really concentrated in the third quarter.

Jim McIlree - Chardan Capital

Okay. So I think I get it. And then Jay, you talked about entering new international markets, on a couple of different ways you are going to go after new international markets. Can you put a timeframe on that and comment on how large those markets might be relative to North American markets? And then finally just on that issue, when you are going into these international markets, I’m assuming you are going with a full array of products and services that you have. Is that true or are you just targeting, I don’t know just one or two select products and services?

Jay Monroe

Okay. Let me break this down a couple of different ways Jim. First, in areas where we already have gateways have built them or acquired them during the last several years which would include in parts of Africa and South America predominantly, we have done the gateway work necessary in order to begin to sell in those areas aggressively going forward, our focus right now is on Brazil. There we will sell all services Duplex, Simplex, SPOT and the new SPOT products, although the distribution channels there are somewhat different than they are in the United States and each country is somewhat different than the United States.

So we have to tailor it for those marketplaces, but we do intend to sell the entire array of products. So if you were looking for markets that will pick up earliest, I would look in South America for us. When you look at other areas where there are gateways on the ground that need to be restarted, some of these are gateways that had been in disrepair for a period of time and so will require work. And so the exact timeframe for those I really can’t judge, we’re certainly working on them now, but I wouldn’t expect much in 2014 that we would come out of those geographies.

But they are important to us long term and with a new constellation obviously we want to get the benefit of the use of the satellites in those areas as well as other areas. Historically Globalstar’s revenue from North America was 80% to 90% unless you go back to the period in 2006 and before when that was probably a lower percent overall, but we hope that percentage will decrease in North America not because anything goes down in North America but because revenue goes up in other parts of the world.

Jim McIlree - Chardan Capital

Okay. But the South American generally in Brazilian markets specifically is something that you do hope to get revenue contribution from in 2014?

Jay Monroe

We hope to get larger and larger revenue participation out of them in 2014, they operate, now there are certain number of subscribers there, but we are staffing up to salesforce in those areas in order to grow them as rapidly as possible.

Jim McIlree - Chardan Capital

Right. I am sorry, thank you. And then just one more thing on the NPRM, as you have molded that over, have you thought anyways that it might change the potential partnering that you do with the business models that you pursue as one thing lot more or less attractive now that you have had time to digest it and as you talk to some perspective partners?

Jay Monroe

No, I don’t think anything has changed, we are more optimistic than ever that opportunity is as large as we imagined that. I mean think about it from several different perspective. We have the ability to transact on a lease basis with people and companies that are interested in utilizing the spectrum. You also have the opportunity to do creative revenue sharing arrangements with parties that have ideas for the utilization of that spectrum. The good news to us is that the people that we are dealing with are all large companies, well healed and able to make a difference in the marketplace. And so when you have a conversation with them, part of the balancing act for us is to recognize how to get the most out of the spectrum, operationally at the earliest possible time. And so, as you can imagine it's a very, very interesting process for us right now. But just an enormous amount of upside in how we carry on those conversations with various parties, each of which have very, very different business models for the use of TLPS.

Jim McIlree - Chardan Capital

Alright. Okay, great. Thanks a lot. I'll get back in line.

Jay Monroe

Okay. Thank you Jim.

Operator

Our next question comes from Vikas Tandon from Bastogne Capital. Please go ahead.

Vikas Tandon - Bastogne Capital

Hey guys. Thanks for taking the question. Couple of quick questions, one on the numbers, one on TLPS. On the numbers, as we look at the marketing spend, you said you kind of incurred an additional $1.6 million. Was that sort of, I don't want to say onetime in nature, but was that related to kind of relaunching the service and should we expect to see the marketing G&A kind of go back to traditional levels or will this increase spend continue for a little bit?

Jay Monroe

I think you should look at it as continuing. We'll be disciplined about not having the marketing spend too far out in front of the revenue generation. But we have a new constellation and everyday that it's up there and not full as a wasted day. And so we have to spend more on marketing and we have to drive substantially more sales overtime. That said, we will be disciplined about it. And it's very, very important to us, that we do those things in walk step. So that we see td results of whatever it is that we're proposing in terms of marketing plans and whatever regions of the world of we're rolling them out and that we get results. And if we're not getting the results that we want we have to adjust the plan, adjust the spend and so we can make sure that we are operating correctly in various regions of the world. Each of these regions as I mentioned before are different. And so you have to be careful to not just spend all of your money with a pre-set plan that it does not develop the results that you want, I am more comfortable doing that but I would not expect the marketing spend to go down.

Vikas Tandon - Bastogne Capital

Okay. Just I am assuming that this sort of increase in marketing spend that was part of your plan when you renegotiated the covenants in the business plan with the COFACE guys?

Jay Monroe

Yes, absolutely.

Vikas Tandon - Bastogne Capital

And then on the TLPS side, you talked on the call when the news first came out, you talked today about the lack of build out requirements how that’s a significant properties, then you sort of referenced that potential partners you've been talking to would be pleased with that. I know you can’t get in the too much specificity, but can you give some as to since the announcement of the NPRM the tender of those discussions, have they accelerated what is the reaction been from the guys that you've been talking to?

Jay Monroe

I don’t I can comment on any specific conversations. And perhaps you weren’t asking that. But to answer specifically the build out question, if you think about getting to market with a fully usable 22 megahertz of spectrum and you think about using it in a Wi-Fi like environments, that spectrum can handle an enormous amount of capacity and it can do so because there are so many atlas point around and addressing the network. As a result the amount of traffic totally over 22 megahertz can be enormous, I mean just enormous, so the conversations we’re having with people involve ways to maximize that use. So when you look the total cost to a party of operating there are really three elements of it, there is the cost of the infrastructure, there is the cost of the spectrum and marketing.

In our case, the cost of the infrastructure is almost, well, I won’t say zero, but it’s exceedingly low when compared to the build out cost of any comparable cellular network, which can possibly handle that much capacity because of the nature of what a cellular is. So the balance between costs and potential revenue is tilted very much in favor of TLPS and therefore the conversations are as I said, interesting, they are ongoing, they are multi-faceted and it will take a little while before, I believe that they come to fruition so stay tuned.

Vikas Tandon - Bastogne Capital

Okay. No, I know this and I was just sort of trying to ask more generally if you can speak during, [when that facility] -- just you guys have expressed a real excitement about the NPRM and kind of how the FCC structured it, generally speaking has that excitement has been shared by the guys you've been talking to?

Jay Monroe

Yes, absolutely.

Vikas Tandon - Bastogne Capital

Okay, perfect. Thank you very much.

Jay Monroe

Welcome.

Operator

(Operator Instructions). And our next question comes from Steve Watts, Private Investor. Please go ahead.

Unidentified Analyst

Yeah. Hey guys. Question regarding the stock price, are you able to provide some kind of guidance of roadmap as to when you will begin to consider relisting?

Jay Monroe

Yes I think I can tell you what the standards are for relisting. It is you must be for a company of Globalstar’s size over $2 for 90 days and if you are over $2 for 90 days you can petition and be relisted by NASDAQ if you chose to go back to NASDAQ. In the alternative if the stock price is over $3 for five days you can also be relisted on NASDAQ. If you chose to go to the NYSE, the process is a little bit different and one that I am not quite as passive with right now, but it’s not a simple relisting, it’s a new listing. And that process is one that would for us would involve having to do a stock reverse and that is something that we have not determined as a company that we’re willing to do at this time.

Unidentified Analyst

Okay great. Thanks a lot and congratulations again on the -.

Jay Monroe

Thank you.

Operator

Our next question comes from Michael Rindos from Midtown Partners. Please go ahead.

Michael Rindos - Midtown Partners

Hey guys nice quarter.

Jay Monroe

Thanks Michael.

Michael Rindos - Midtown Partners

Wanted to talk a little bit about subscribers and you mentioned that you had a good number of underperforming subs churning off the network. I was hoping that you could comment on the case of which that might continue and the obvious impact on ARPU for the next few quarters?

Jay Monroe

Sure Michael. So if you look at the performance in terms of net ads per quarter going back the last couple of years, you can see a continued degradation in the total number of ending subs for our duplex space. And historically going back to 2006, the total sub [days] was over a 120,000 and ad spend decrease. We ended the year last year at 84,000 and today have about 85,000. But I think importantly, just about every quarter over the last couple of years, we have lost on a net basis 1,000, 2,000 sometimes even 3,000 or more.

For the first time in a long time, Q2 of this year we experienced a rebound where on a net basis we began to add subs. We did that again for Q3 of this year. So if you are looking at year-over-year performance, you see a decline in the total number of subs. You see an increase however, a significant increase in the total number of paying subs. So probably not the best comparison to look year-over-year all together we speak to probably next couple of quarters and couple of years, we are going to play out. But I think we have passed them and are no longer going to experience negative net ads and we are in the positive territory again.

But right now we’re at about 60% paying duplex subs bad debt from about 50%. We have ongoing initiatives to convert both low value subs and subs that are on reasonable plans, $40 and $30 plans. And moving them to more attractive plans that match their usage pattern and that of course increase ARPU for us, ARPU got below $15 just two years or so ago and now we are above $24, I think that trend should continue and we should be approaching over the next four quarters, six quarters back-up to $40 plus, which is our main targeted plan at least for now.

So it’s an exciting time as Jay talked about, just about every major data point for our high value duplex subs has been very positive ARPU, net adds, gross ads. I think the releases of the SPOT going to help drive those numbers. So you can see overall what we're looking at on the top-line going back to the 8-K from August. And the duplex growth is going to be a major contributor to the overall revenue uptick over the next couple of years.

Michael Rindos - Midtown Partners

That's great. Thanks.

Operator

And we have a follow up question from Jim McIlree from Chardan Capital. Please go ahead.

Jim McIlree - Chardan Capital

Yeah, thanks. Jim, I think you just answered the question I was going to ask, duplex ARPU and as trajectory. But it sounds like you are expecting the same kind of steady increases in the coming quarters that you've seen in the past couple of quarters in terms of ARPU. Is that fair enough to model it that way?

Jay Monroe

Yeah. I think that's right. The efforts are a couple of quarters old at this point and we started earlier this year to convert the low value subs to high value paying subs. That resulted in two things as expected, significant increase in ARPU, but also slight increase in churn. But we're also churning off low value subs. High value subs that we're paying and have been paying, they are staying very wrong and historically and [NMSS] not just us, but our other competitor’s churn is very low. And so the increase in churn that we've seen this quarter is just churning off the low value subs.

So I think certainly over the next couple of quarters we're going to see the impact from the conversion of the low value subs, but then also you’ll see an impact of the core plan that we offer which is at a minimum $40 before any excessive usages is plied which increases ARPU. You’ll see as new subs come on and become a greater portion of the overall subscriber base that will continue to increase ARPU at the same time as we continue the efforts to do the conversions on the historical base.

So I think those two overall efforts are going to continue to drive duplex ARPU. Long-term I don’t believe that we're going to be back up to the $70 level that we were seven and eight years ago. But I think getting to a number like 45 or 55 long-term is where we're currently targeting. But I think you’ll see the continued growth quarter-after-quarter certainly on the same path that we’re on now over the next four quarters.

Jim McIlree - Chardan Capital

Okay. And you have a substantial inventory of handsets is that enough, how long do you expect that to last?

Tim Taylor

So I mean certainly it depends on these tick up in the market. We've had as Jay mentioned, 4,600 gross ads for this past quarter and we have about 45,000, 1,700 our core duplex equipment that we have on the balance sheet today. So on top of that, we have additional boards that are available to us up to 200,000 from Qualcomm. So a 250,000 total potential and core 1,700 units certainly should last us for the next three years and take us into the conversion from a Qualcomm-based system to the Hughes network which will be done and fully completed before the end of 2015.

So I would love to say that we’d be able to fully deplete 250,000 handsets and maybe that's a possibility. But inventory using any kind of reasonable case is not going to be experiencing any kind of shortage as we make the transition from Qualcomm to Hughes in the next couple of years.

Jim McIlree - Chardan Capital

And that inventory has held at the original cost, is it or has it been written down?

Rebecca Clary

It’s been written-down some over the years.

Jim McIlree - Chardan Capital

Okay. So from a margin perspective, as well as the cash flow perspective there will be a highly favorable transition as that inventory gets depleted?

Rebecca Clary

That's right. The margin is essentially at zero because the cost is essentially the selling price, but 100% cash inflow.

Jim McIlree - Chardan Capital

Right.

Jay Monroe

Jim, I think that's an important component of potential liquidity over the next couple of years had the duplex balance is reduced we have a total inventory balance of about $38 million today. Our target long-term is about $10 million. So over the next two years, I think that's potential to draw in excess of $28 million or so that have I’m sure you’re modeling that in your forecast, but certainly a substantial component of our total liquidity availability over the next couple of years.

Jim McIlree - Chardan Capital

All right. Well, I am confused now. So are the Qualcomm handsets and chipsets they do have a positive value in your inventory or they’ve been, they didn’t written down substantially, but not fully is that what you are saying?

Jay Monroe

They have been written down to what essentially we’re able to generate from per unit, on a per unit basis the amount of revenue that we achieved. So essentially every 1,700 the core phone is selling at our take which is $360 that’s on our books for about $360. So from EBITDA income statement hit the contribution is zero, but every unit that we sell is essentially $360 of incremental cash flow for us. And again that’s about $38 million of total and that will wind down overtime. So it doesn’t look like it’s very profitable or helpful from income statement hit, but certainly very helpful for us in terms of cash sources.

Jim McIlree - Chardan Capital

Okay, good. I got it. Although I’m not going to guarantee I won’t ask it again.

Jay Monroe

No problem.

Rebecca Clary

No problem.

Jim McIlree - Chardan Capital

Al right. Thank you.

Rebecca Clary

Thank you.

Operator

And we have no further questions at this time.

Jay Monroe

Hey operator. Thank you. And thanks to everybody for joining this afternoon. With the recent accomplishments in completing the second generation constellation and the financial flexibility through the financings, new product rollouts and positive developments to provide terrestrial broadband services we’re poised to take advantage of these transformative opportunities. And appreciate you all listening today and look forward to speaking to you again soon.

Operator

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

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