Globalstar Q3 2007 Earnings Call Transcript

Globalstar Inc. (GSAT)

Q3 2007 Earnings Call

November 14, 2007 5:00 am ET

Executives

Dean Hirasawa - Director of Public and Investor Relations

Jay Monroe - Chairman and Chief Executive Officer

Fuad Ahmad - Vice President and Chief Financial Officer

Tony Navarra - President of Global Operations.

Analysts

Jonathan Catherine - JPMorgan

Josh Burman - Analyst

Elliot Abolofia - Analyst

Georgian Huesman - Analyst

Josh Burman - Analyst

Aaron Chan - Criterion

Keith Wang - Callisto Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2007 Globalstar Inc Conference Call. My name is Audrey (ph) and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference (Operator Instructions).

I would now like to turn the call over to your host for today Mr. Dean Hirasawa, Director of Public and Investor Relations for Globalstar Inc. Please proceed, sir.

And please stand by for the start of the call.

Dean Hirasawa

Everyone, thank you for joining us for today's conference call to discuss the quarter results for Globalstar Inc for the quarter ended September 30, 2007. Before we begin please note the following.

This call may contain forward-looking statements within the meaning of Federal Securities law. Factors that could cause results to differ materially are described in the Safe Harbor section of today's press release and in Globalstar's SEC filings including quarterly report on Form 10-Q for the quarter ended September 30, 2007.

Both the press release and this conference call include discussion of certain non-GAAP financial measures as defined under SEC rules. We have provided a reconciliation of each of those 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 Wednesday, November 14, 2007. Today's press release contain certain financial information, is available on the company website at globalstar.com.

Later this afternoon, an audio recording of this conference call will be available via telephone dialing and a webcast recording will also be made available on the company's website.

On the call, we are joined today by Mr. Jay Monroe, Chairman and CEO of Globalstar Inc., Mr. Fuad Ahmad, Vice President and CFO, and from Europe where he is attending meetings with both our satellite manufacture and launch provider, we are joined by telecom by Mr. Tony Navarra, President of Global Operations.

Each of these gentlemen will be presenting this afternoon and all three will be available following the prepared remarks to take questions if time allows.

At this time, I would like to turn the call over to Mr. Monroe.

Jay Monroe

Thank you, Dean. Thank you for joining Globalstar's quarterly earnings call. Earlier today we released financial results for the third quarter of 2007. And I'm pleased to have the opportunity to discuss these results with you this afternoon.

There's a lot to discuss so lets jump right in. Once again Globalstar continued to demonstrate subscriber growth. We completed the quarter, with 285,268 subscribers or roughly 30,000 more than we had at the end of the third quarter last year.

The quarterly increase of approximately 7,600 net new subscribers enables us to maintain our position as North America's market share leader and most widely used satellite service provider.

We ended the third quarter of 2007 with an adjusted EBITDA of approximately $7.8 million compared to an adjusted EBITDA of $5.5 million during the second quarter of this year. Fuad will go through the financials results in more detail shortly.

During our previous calls, I've stated that over the next 24 months along with our quarterly core business highlights and financial results, we will provide you with updates on four areas which are key to Globalstar's long terms business success.

First, the manufacture and launch of our second-generation constellation. Second, the utilization of our satellite spectrum for the provision of ATC services in the United States and abroad. Third, new and innovative simplex data product introductions, and fourth, Globalstar's numerous international initiatives. I'll take this opportunity to provide you with the latest updates.

First, regarding our second-generation space segment. During the quarter we continued with the design and development efforts paving the way for the transition to our second-generation satellite constellation. This constellation is being built to provide high quality and reliable satellite voice and data services until at least 2025.

Globalstar made initial payments to our satellite manufacturer Thales Alenia Space in order to accelerate delivery of our second-generation satellites. With these payments and success at Thales delivery could begin as early as March 2009 or roughly 16 months from today.

In early September, we signed an agreement with European launched Services Company Arianespace for a second-generation satellite constellation. The agreement provides Globalstar with the ability to launch the first of our second-generation satellites consistent with the earliest possible satellite deliveries from Thales.

Globalstar will again be using the highly reliable human rated Soyuz launch vehicle, which has been used successfully to launch 32 previous Globalstar satellites since 1999 including the four, which were launched just last month.

Tony, will provide a brief update regarding these newly launched satellites and the status of our current constellation shortly. The agreement provides for up to eight launches from either Arianespace's Guiana Spaceport located in French Guiana or if needed the Baikonur Cosmodrome.

The Spaceport has been operational since 1968 and has been site of more than 460 launches and Globalstar has launched many times from Baikonur. Globalstar invested roughly $120 million to successfully launch our eight satellites during 2007.

We think of these as the initial components of our next-generation constellation because they not only help bridge the gap today, but we expect these eight satellites to last long into and to seamlessly operate with our second-generation constellation.

The second key area of our business, which I update today, concerns our ATC spectrum and our worldwide spectrum opportunity. As most of you now, in 2006 the FCC licensed 11 megahertz of our 27.85 megahertz of spectrum for Ancillary Terrestrial Component or ATC use in the United States.

This ATC capability, especially when expanded, will unable Globalstar to partner with a number of industry players to fulfill both their and our requirements for new spectrum dependent products and services.

We are very pleased to announce that late last week Globalstar received a Notice of Proposed Rule Making or NPRM from the FCC for increased authority to offer ATC services in the United States.

The NPRM seeks comment on Globalstar's use of up to 19.275 megahertz of its L and S-band spectrum in the United States for ATC. This would permit us to develop integrated wireless, voice and data solutions operable virtually anywhere, including urban areas, remote communities, and even indoors.

We believe this NPRM is a major step in realizing on our ATC opportunity and providing a broad range of communication services to hard to reach consumers and businesses.

During the third quarter, we accelerated discussion with several companies interested in collaborating with us to bring new and innovated products and services to various markets, which could benefit both from our spectrum and our satellites.

One of these companies is Open Range Communications. On October 31, Globalstar entered in to an agreement with Open Range that permits Open Range to deploy service in certain rural geographical markets in the United States under Globalstar's ATC authority.

This agreement is the first of what we hope would be many future ATC agreements for Globalstar. To our knowledge, this is the very first ATC deployment agreement to be signed and it would directly benefit millions of un-served and underserved rural Americans. Because of this, we believe it may well set the precedent for all future agreements of this type for Globalstar and other ATC providers.

Open Range will use our spectrum to offer dual-mode mobile satellite and terrestrial high-speed wireless broadband services, first to over 500 world American communities initially covering about 6 million people.

Commercial availability is expected to begin in selected markets in late 2008. The agreement has an initial term of 30 years, is co-expensive with our ATC authority, and a subject to renewal options exercisable by Open Range.

Open Range has options to increase its coverage up to 50 million people. We believe that based upon Open Range's debt-financing assumptions contented in their RUF (ph) loan, and based upon the potential fixed and invariable payments to be made by Open Range.

The indicated value of this spectrum is between $0.30 and $0.40 per megahertz POP over the initial 30-year term.

According to the agreement, open ranges down payment will be $3.6 million and annual payments in the first six years will grow from approximately $1.2 million to $10.3 million, while this agreement covers only a small portion of our spectrum. We believe it establishes a framework for how additional spectrum maybe monitorized.

The final amount of any payments made to Globalstar, will depend upon a number of factors including the eventual geographic coverage and the number of customers on open ranges systems. Globalstar will also make a $5 million preferred equity investment in open range, $1million of which was made available November 1st.

The agreement is contingent on various conditions including finalized ATC authority as well as FCC and other governmental approvals as may be required. Open range has received approval for loans under a federally authorized government program for $268 million.

They've also secured a commitment for approximately $95 million of private equity financing. To initially covering only 2% of the U.S. population, we consider the open range transaction a groundbreaking agreement for many reasons, including the options which if exercised would allow open range to cover more than 15% of the U.S. population.

On a worldwide basis, other regulators are considering ATC like proceedings in Western Europe, Canada and we've heard in certain countries in South America. Spectrum proceedings continue, and Europe has already authorized the first ATC like system, complementary ground component refer to their SCGC (ph). All of these regions represent potential opportunity for us over the next 5 to 10 years given our substantial international spectrum position.

The third area up quarterly focus relates to our core offering of enhanced satellite base simplex data and position location solutions. This area of our business has grown significant, due to both market demand plus the fact that our satellite constellation offers greater than 99% simplex data reliability.

Simplex data products and services used for a number of cost effective and reliable asset or personal tracking, fleet management and data monitoring applications. We're expanding our infrastructure worldwide. During the third quarter, we signed an agreement with AeroAstro to purchase four simplex data applicase, which provide us with the ability to further expand Globalstar simplex geographic coverage and to grow simplex capacity in Asia and Latin America.

AeroAstro will also provide Globalstar with the ground network upgrades, needed to expand the customer messaging capacity by Tenex and increase receiver sensitivity by up to 40%. Increased sensitivity further expands the geographic coverage of Globalstar's gateways and is expected to improve simplex message transmission reliability, which already exceeds 99% in the gateways primary coverage area.

Delivery of the necessary upgrades are scheduled to begin in early 2008. Most significantly, throughout the third quarter, Globalstar's fully owned subsidiaries SPOT Inc. was preparing for the November 1st launch of this SPOT satellite messenger. A simplex data solution they represent the next generation of affordable satellite based consumer products.

We're just over seven ounces and priced it less than $170; SPOT is an economical compact, satellite personal safety device that uses the Globalstar simplex data network. SPOT provides customers with the ability to send the message for help from virtually anywhere with the pushable button and because it is also GPS based, it can led rescue workers know where to pinpoint the person in trouble.

I'm proud to say that yesterday in New York city, the international consumer electronic show or CES, which is the worlds largest consumer technology trade-show announced SPOT as an innovations, design and engineering award honoree for 2008.

Sponsored by the consumer electronic association, the innovations awards highlight product advancements and technology, design and engineering. The awards provide manufacturers and developers the opportunity to have their products judged by an independent panel of journalists, designers and engineers.

Honoree's will be highlighted and featured in the CES innovation showcase and media and analysts will see the 2008 honorees during CES unveiled, which is the official press event for the consumer electronic show held every January in Las Vegas. We believe the addressable market for our spot product in North America alone is approximately $50 million and we hope to capture 2% to 3% that market over the next three years.

We will also market our spot product aggressively overseas including South and Central America, Western Europe and through our entire network of independent gateway operators in their respective territories.

Globalstar will distribute and sale spot through a variety of existing and new distribution channels. When the process assigning distribution agreements with a number of Big-Box retailers and we've already signed to begun distribution to Amazon.com and to outdoor oriented retailers including BASS Pro Shops, Cabbalas, West Marine, Oriai, Josh Boats, Big Five, Boaters World and Sportsman's warehouse. We expect to be in approximately 5,000 retail or wholesale outlets by the end of the first half of 2008 and 10,000 outlets in 2009.

Today we have secured firm poach purchase order since our launch November 1st of over 20,000 spot units. We also intent to sell directly using our existing sales force of 800 dealers, agents and resellers into key vertical markets and through our direct e-commerce website, which is www.findmespot.com.

This product is also just the first and what we expected to the series of innovative spot satellite product design for the everyday consumer. This represents a high margin product for Globalstar and we expected to be a high growth business for the next few years.

Also on the simplex data front, early in the third quarter we announced that our integrator Guardian Mobility Corporation have launched a new group a satellite data modems known as the Tracer 3 Product Family. These modems contained unique firmware that will make them increasingly adaptable for number of ground based remote asset tracking applications.

In October, Globalstar simplex integrator Orbit One a Numerex company launch the SX1 satellite asset tracking product. Weighing only 13 ounces the new SX1 is a lightest and the smallest Globalstar simplex data modem. It's designed for a global supply chain asset management, fleet tracking and data monitoring applications.

Both of this new products are expected to gain traction and materially contribute to our 2008 business. Orbit One has also purchased over 30,000 simplex transmitter units, used for integration into this and other solutions, demonstrating their continued commitment to delivering reliable simplex data products. We expect other Globalstar integrators to introduce additional new and innovative simplex data products to the marketplace in 2008.

Finally, I'd like to update you on our global initiatives, as most of you already know we sell satellite voice and data products in over a 120 countries around the world and, therefore, a business mix is international in scope. We intend to continue the strategy of expanding our ground station capabilities and to construct new Globalstar own facilities in order to expand the geographical area in which we can market these products.

As mentioned earlier we completed an agreement with AeroAstro for the purchase of four simplex data application to further expand our geographic coverage and capacity specifically in Asia and Latin America.

We continue our initiative with Singapore Telecommunications Limited to expand our services into parts of Southeast Asia. Construction of the new Globalstar gateway in Singapore is on track for a summer 2008 completion date.

I'm pleased to announce that we've signed agreements with GlobalTouch West Africa Limited to offer Globalstar satellite voice and data services to customers in Nigeria, the surrounding portions of Western Africa, as well as parts of Coastal Atlantic and Gulf of Guinea maritime region.

GlobalTouch's headquarter in Legas, Nigeria. Nigeria is Africa's most populist country and one rich and remote natural resources. The new satellite gateway will be located in Kaduna, Nigeria and Globalstar will own 30% of the new venture.

These agreements become effective once we've receive the first payments from GlobalTouch. Globalstar has also just signed an agreement with Loral Space & Communications to purchase their South American Globalstar business including three gateways in Brazil.

The purchase price of $6.5 million will be paid entirely in Globalstar common stock. The final closing is contingent on a pending approval of the Brazilian Telecommunications Agency, registration statement for the shares of the common stock issued as consideration in the transaction needs to be declared effective by the Securities and Exchange Commission and the final signature of one minority partner.

We're also very excited about this agreement because it provides Globalstar with direct access to a market of nearly 200 million people for our broad range of satellite 2A, Simplex and SPOT products.

Now I'd like to turn the call over to Chief Financial Officer, Fuad Ahmad.

Fuad Ahmad

Thank you, Jay. We added approximately 22,500 net subscribers during the first nine months of 2007 compared to approximately 59,800 for the same period in 2006. We ended the period with approximately 285,300 customers on our system.

The nine months ended September 30, 2007 we recorded total revenue of $74.7 million compared to $107.4 million for the same period last year. And total adjusted revenue of $77.8 million compared to $112.3 million for the comparable period in 2006.

Our year-to-date adjusted service revenue was $61.9 million a decrease of $12.8 million or $17.1% from the same period last year. This decrease can be attributed to lower retail ARPU as a result of power introduction of certain lower price plans in at customer retention low overage charges due to network issues.

Year-to-date coupon revenue was $16 million, a decrease of $21.6 million from the same period last year. The decrease was due to significant equipment buying that occurred in 2006 in preparation for potentially severe hurricane season that has been predicted for 2006.

And few gross addition for the first nine months ended September 30, 2007. Our coupon margin continues to improve since the introduction of our second-generation products into the market earlier this year. Our margin on equipment sales for the nine months ended September 30, 2007 was 40.1% compared to 2.5% for the same period in 2006.

Operating expenses for the nine months ended September 30, 2007 were $91.5 million compared to $92.9 million for the same period last year, a decrease of 1.5%. The year-to-date number in 2007 includes a one-time non-cash asset impairment charge of $17.3 million, a write-down of certain first generation product inventory. Excluding this one time charge our total operating expense actually decrease by $18.7 million or 20.1% related mostly to lower cost of equipment considerable lower equipment sales for the nine months ended September 30, 2007.

Adjusted EBITDA for nine months ended September 30, 2007 was $18 million compared to $23.8 million for the same period last year. Our adjusted EBITDA margin improved to 23% for the nine months ended September 30, 2007 from 21% for the same period in 2006.

Our year-to-date retail ARPU was $46.21 and adjusted retail ARPU $48.80 compared to $61.61 and $66.80 for the same period in 2006.

And now for the Q3 results. We added approximately 7,600 net customers to our systems during the third quarter of 2007 compared to 19,200 for the same period last year. We ended the quarter with $25.7 million of total revenue and $25.2 million of total adjusted revenue.

Our adjusted service revenue was $20.8 million, a decrease of $6.4 million or 23.7% over the same period last year. The decrease can be attributed to lower ARPU for the reasons mentioned earlier.

The three months ended September 30, 2007 the coupon revenue decreased by $6.6 million to $4.4 million. Total operating expenses for the quarter ended September 30, 2007 was $26 million compared to $29.9 million for the same period last year. The decrease was due primarily to lower cost of subscriber equipment consistent with lower equipment revenue for the current quarter.

The decrease was offset partially by non-cash stock compensation expense and high depreciation expense for this period. Before ended September 30, 2007 we recorded adjusted EBITDA of $7.8 million compared to $10.1 million for the same period last year. Our adjusted EBITDA margin improved to 31% in the third quarter of 2007 from 26% from the same period in 2006.

We recorded retail ARPU of $48.41 and adjusted retail ARPU of $46.79 for the quarter ended September 30, 2007 compared this to $69.40 and $68.64 for the same period in 2006.

Cash capital expenditures for nine month ended September 30, 2007 were approximately $128 million. This included approximately $31.3 million for the launch activity related to our spare satellite and approximately $93.8 million for the second-generation satellite procurement.

Cash capital expenditures in the third quarter of 2007 were approximately $54 million that included approximately $8.6 million for the launch by spare satellite and approximately $38.6 million for our second-generation Constellation procurement.

With that I'd turn it over to Tony.

Tony Navarra

Thank you, Fuad. In the third quarter, we continue to our Constellation Network analysis and implemented engineering changes designed to improve our overall operations. Our call success rate was improved to the initiations of these constellation and gateway enhancements.

Key to this improvement for our Duplex voice and data service was the introduction of the optimum satellite availability tool for '07. Assigning gateway access to the strongest satellites available and optimizing subscriber access satellites passing overhead with the closest service in gateway.

We will continue to analyze our constellation and network operations in order to extended twice and improve our subscriber experience. From an overall constellation perspective, we've pleased to report that our Duplex service experienced no significant degradation or failures since our last call.

Of course, our Simplex service which operates using L-band spectrum continues to operate using 48 of our satellites and is well positioned to service our asset and tracking customers as well as our new subscribers on the spot service.

As James has described to Starsem, which was Cosmos, the Russian's Space Agency successfully launched our four satellites on October 21st at 02:12 in the morning by covert (ph) time into a 920 kilometers phasing altitude.

A launch team placed our satellites within two kilometers of the desired position. We are now moving them into the orbital planes to provide service. With the 2007 launches of our final eight first generation satellites, I'd like to acknowledge the fine work of all of the Globalstar employees, space systems were out, the prime contract before our first generation satellites.

Thales and a launch provider Starsem who made these launches such a success. The four satellites launched in late May are all positioned in the orbital planes and providing service as anticipated and the first satellite from our launch in October started to provide service on November 8.

I'm pleased to report that good progress is being made on all three of our major satellite ground control segment and launch contracts. We continue to conduct the Thales Alenia our second-generation constellation program design reviews for the satellites, their subsystems and major components.

These designs and assemblies remain on schedule. Our team is currently meeting in Europe to review the critical design reviews of our payload subsystem antenna designs and the amplifiers as well as key mechanical and electrical interfaces.

We are also conducting inauguration meeting with Thales Alenia space in Arianespace to affirm the launch expensive configuration and launch schedule. We've reached an agreement with Thales Alenia they provide Globalstar the opportunity to accelerate the delivery of the initial 24 of our 48 second-generation satellites on order by as much as four months.

This actual acceleration depends upon on going work at Thales, but we are optimistic about the outcomes. By attaining this satellite earlier we maybe able to integrate them with the launch vehicle earlier.

Therefore, accelerating the transition service between the first and second-generation by several months. Our first satellite deliveries may comment as early as 16 months from today, assuming the Thales is successful in the acceleration effort.

The initial designer view for our control network facility, which conduct in a third quarter with Thales Alenia space. The software and computer baseline was selected by Thales to provide the design and manufacturing of the telemetry control units, In Orbit Test Equipment, satellite and control software to manage both the first and second-generation satellites as well as the ground control network.

On the launch site in early September, we entered into a contract with Arianespace to launch our next generation satellites on board a Soyuz rocket using a dispenser capable of inserting six satellites into orbit.

The contract also includes provisions for ground launch preparations and management for the launch of the first 24 satellites or four launches of six satellites per launch. Including the contract our options for launching remaining 24 satellites.

Based upon the launch profile and mission needs, we may launch only the Crew in French Guiana or from Baikonur. Our worldwide independent gateway operator initiatives continuous plan with construction of the Singapore gateway proceeding on scheduled.

The new gateway will be used by Singapore Tel to provide tracking solutions apart to South East Asia has expected to begin operations in the summer of 2008. In addition to our Globalstar data integrators our independent gateway operators also continue to develop their own new an innovative integrated products solutions for use with the Globalstar Simplex data network.

Our specific interest in representing a dual-mode and bi-directional capability is the newly developed GSM and GPRS product integrated with our Simplex products. This new product application is currently being certified by Globalstar and manufactured by Falcon and Globalstar to Mexico; it's expected to be launch into service in the first quarter of 2008.

With that let me pass it back to Jay for some closing comments.

Jay Monroe

Thanks, Tony. Before concluding the call today, I'm pleased to announce that Thermo intends to take over the current Wachovia Credit Facility on substantially similar terms, as they exist today.

We expect to amend certain of the maintenance covenants ensuring that Globalstar will continue to have access to the entire $150 million credit facility and will provide the company with the ability to draw on the funds as and when required.

This action by Thermo demonstrates again our continued and aggressive belief in Globalstar's future. At the appropriate time and given the stable market conditions Globalstar intends to access the capital markets to augment funding required to fully execute our CapEx requirements.

In summary, during the third quarter we demonstrated continued subscriber growth and we made significant progress advancing our space segment, our simplex data initiatives and the international expansions strategy.

At the end of the quarter, we continue to maintain our leadership position as a largest North American based mobile satellites service provider. Most significantly, the third quarter response to the introduction of our subsidiaries new product.

The SPOT satellite messenger with overwhelmingly positive. The acceptance of SPOT demonstrates the substantial potential opportunity for Globalstar to successfully market affordable consumer based satellite solutions, as we transition to our second-generation satellite constellation.

Thank you, again, for joining us today, and I look forward to speaking to you again in about three months.

Tony Navarra

Thank you, Jay. That concludes the prepared portion of the presentation, we will now take the opportunity to answers some questions. Operator, can you please proceed with the first question.

Question-and-Answer Session

Operator

(Operator Instructions)

Tony Navarra

Hello, operator. We are not hearing you on this end so can you just proceed with the first question please.

Operator

Your first question comes from the line of Jonathan Catherine (ph) with JP Morgan (ph). Please proceed.

Jonathan Catherine - JPMorgan

Hi. Good evening, two quick questions if I may. I'm wondering if you could give us a little bit more contexts for how you get to the $0.30 to $0.40 in spectrum value under the arrangement you have with Open Range.

In terms of what we determined, where you end up with, at high end of that range or low end of that range? And what some of your assumptions are? I'm wondering, if could also give us an idea of what the trends were for subscribers in Simplex versus Duplex? That'll be very helpful. Thanks.

Fuad Ahmad

Okay. Jonathan, the answer to the first question is that this is a relatively complicated spectrum arrangement and it involves both fixed and variable payments over a primary term of 30 years. And so in order to get to the calculation of $0.30 to $0.40 you have to make certain assumptions about the cost of capital of Open Range and the rate at which they add subscribers to their system. I'm using the numbers that they have used underpinning their arrangements for their debt deal. The calculations at varying discount rates between 8% and 12% yield between $0.30 and $0.40/MHz-POP.

Jonathan Catherine - JPMorgan

So, that 12% discount rate you end up with $0.30/MHz-POP.

Fuad Ahmad

Right. Although their cost of capital is substantially lower than that. It's actually about 8%, because the debt is at a very good interest rate.

Jonathan Catherine - JPMorgan

Okay. And can you give us a little bit context for, when you negotiated these terms with open range. How you came about, how you came to the conclusion that this $0.30 to $0.40 is a fair market base rate?

Fuad Ahmad

I'm doing with a good deal of discussion around that issue as you might imagine. And we all looked at a series of databases everything from arm's length transactions in the world marketplace through and including our auction data for the last several auctions and pass to that data for both its urban and its world characters.

And ultimately, reached an agreement between the two company's on just an arm's-length negotiated basis.

Jonathan Catherine - JPMorgan

That's really helpful. As you looked to that data, Open Range is obviously, just taking rural spectrum from you. Would the values that you seen in other transactions for suburban and urban spectrum of higher or lower than the $0.30 to $0.40 that you agreed to with open range.

Fuad Ahmad

They're substantially higher.

Jonathan Catherine - JPMorgan

Great. Thank you very much. Yeah, if could you just give us some color on the sub-trends that would be great?

Jay Monroe

Hi, Jonathan. How are you?

Jonathan Catherine - JPMorgan

Good. Thanks.

Fuad Ahmad

Jonathan, we have traditionally not broken out our customer accounts by various elements, but I can tell you I think what you are probably asking about 40% of our growth at in the third quarter of simplex and the remaining were duplex.

Jonathan Catherine - JPMorgan

Okay. And on the net basis is duplex still relatively stable?

Fuad Ahmad

A more or less.

Jonathan Catherine - JPMorgan

Okay. Thank you.

Operator

Your next question comes from the line of Josh Burman (ph). Please proceed.

Josh Burman - Analyst

Hi, guys. Thanks for taking my question. Congratulations on the ATC deal with open range. I'm very glad to hear that world spectrum is going for such a nice price. My question is really simple about that, how much spectrum is the deal for? Is it just the initially allocated, is that the new stuff or is it L, is it S is it both?

Jay Monroe

It is, Josh its L and S spectrum both. It is initially an arrangement with open range, designed to give them flexibility as they build into the markets. That are their primary, secondary and tertiary markets. And so, it is structured to initially cover U.S.$6 million World POPs in roughly 500 cities.

It grows over the first few years to be 12 million World POPs and can increase to as many as 50 million POPs in the United States. All of those are options available to them and when you get to the top end of that, you've build out about 15% on of the United States.

Then in mostly in world character. The other reasons why this is very interesting to us and very interesting to Open Range is that the technology, which we will ultimately employ, which is fundamentally WiMAX, is applicable to the third world markets and under developed markets, outside of the United States as well.

And therefore any CPE that we jointly develop is available for us to export and use in other regions of the world. And if they Open Range chose to go to some other part of the world and replicate what they're doing in the United States or we chose to do so, we have that available to us.

So we are extremely excited about this. It is the first true ATC deployment in the United States and though we expect others in the near term be they terrestrial or ICO or MSV, we are proud to be the first one, rolling something out using ATC and especially proud to be doing it in an area where you're helping world Americans, who are not served as well as we are in the major urban areas.

Josh Burman - Analyst

Thanks. Congratulation.

Jay Monroe

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Elliot Abolofia (ph). Please proceed.

Elliot Abolofia - Analyst

Thank you. Thank you for taking question. I just have a few 100 shares of stocks, so and that very sophisticated, so I appreciate the opportunity to ask you question. First, I know as that churn rate seem to be rather high this quarter and it seems like its much higher than was last at 1.9 to 2.3 and that was something I wouldn't have expected assuming the dollar is going down and you have quite a broad global market.

So, I was wondering if you could help me understand that?

Jay Monroe

As we pointed out in the past earnings call given that the issues, the network issues we've had. We have seen a certain high usage customers churn off the system and that was particularly case the case in Q3 with typically which is the highest period in terms of usage for the company, for our network.

So you've seen a little bit of the high usage customers churn off the system, but as you know we've continued to add both simplex and duplex customers and the customer so we've been replacing them with customers who are less users, but like the pricing of our unlimited plans.

Elliot Abolofia - Analyst

Why do you think, they're churning off the system. I mean your competitors, I imagine as are the towers around the world and I imagine they can put them in much cheaper. But are we not giving them service or are we giving them poor service? You know why would they leave their network?

Jay Monroe

You know as we pointed out that we did have network issues and in our dealing with them with more pricing, but I don't think I understand that question quite clearly.

Elliot Abolofia - Analyst

Are you're competitors taking your market share because of some inherent problems in your technology, your pricing or marketing plan?

Jay Monroe

You know I think there are some of the higher user customers main deeply going to be some of our other competitors.

Elliot Abolofia - Analyst

It sounds to me like you're really good technology driven company and but is that technology, is it really viable competitor against a cell phone towers and Wi-Fi that sprint in while these other companies have?

Jay Monroe

I think Elliot in a situation where any satellite provider is head-to-head with a terrestrial provider. People generally choose terrestrial and they choose it for several reasons that operates indoors for instance as one.

And satellite providers do not operate that way and so our users are inherently very remote users and so those are, we do not find ourselves are direct competitors of the cellular tower network.

You can have encroachment on remote areas by cellular towers and when you do those customers tend to use cellular and not satellite. One of our marketing challenges over the last several years has to been to bring down the price of our service and bring down the price of the handset.

So that people that are considered to be more and more remote are able to use this system and just a feature of all of us in the satellite industry.

Elliot Abolofia - Analyst

Okay. Well, thank you for your patience and answering my question.

Jay Monroe

You're welcome.

Operator

Your next question comes from the line of Georgian Huesman (ph). Please proceed.

Georgian Huesman - Analyst

Hi. Thank you very much. First question on the retail customer base, I mean have you experienced any net loss or net adds during the quarter?

Fuad Ahmad

In terms of retail side, we were generally flat to little less for the quarter.

Georgian Huesman - Analyst

All right. So slightly less. And then, I guess on the NPRM again congratulations on that. We had been waiting for that for a long time. A couple of questions first of all, into the NPRM looks like there are several parties who are opposed to it some of them looks like I guess on the telecom base they don't really have a case but how confident are you that going to get the full 19.275 of megahertz of ATC spectrum?

Jay Monroe

Well, I think nothing is ever known until it's done at the FCC, Yorgan but we have made our case. We have made our case well. Then I think there is a general belief inside the FCC that what we have asked for is reasonable. We have the NPRM from the FCC specifically carves out an area that we would have shared with the BRS, BAS guys. And I believe that that will mollify most if not all the concern that people have in that area.

Now, we wont know until people file briefs in the case 30 days from now, but we expect it to move quickly through the FCC from this point on.

Georgian Huesman - Analyst

Great. And then, question for Fuad. What's the latest status on the funding of this expect to have a gap of $120 million to $150 million or so?

Fuad Ahmad

Yeah. We reiterate our opposition that we told last quarter of funding gap additional capital requirement will be in the range of $150 million.

Georgian Huesman - Analyst

All right. And then, I guess one question for Anthony or Tony here. The S-band amplifiers continue to degrade I mean what have you seen in the past eight to nine months or so. Is the rate of degradation improving or is it actually worsening or is it kind on a flatten basis?

Tony Navarra

Well, Yorgan basically what we have experience is I just briefly said is no further degradation and if I would be on the optimistic side I would say there are probably doing a little better by maybe one month from our projections of continued operations in the S-band and also I would like to add Yorgan to your question that we are very confident on the technology side for putting ATC in service with some of our wireless terrestrial neighbors.

Globalstar has demonstrated over the last 15 years or so. A good technical base line for our operation and being able to operate with both the EBS and the BRS users as well as other terrestrial services around the world.

Georgian Huesman - Analyst

Great. Just one last question on non-cash stock compensation obviously it's a lot more then expected versus prior quarter, I mean what is your expectation in terms of this charge going forward?

Fuad Ahmad

The reason it is greater this quarter (inaudible) is as we pointed out last quarter in August we rework certain executive compensation from cash base to stock base so you saw some catch up in the current quarter but in the next quarter it's going to be $1.5 million to $2 million range.

Georgian Huesman - Analyst

Right. Thank you very much guys.

Operator

Your next question is a follow-up question from the line of Josh Burman. Please proceed.

Josh Burman - Analyst

Hi, good afternoon guys. Just one other follow-up to the question about the ATC deal again the open range. Can you walk us through the steps in terms of device development and approval and sort of further ATC approval you need to actually get this you said running in about a year. So it must be here sort of the next steps and what sort of landmarks we should look for over the next three to six month to know that everything is moving on schedule.

Jay Monroe

Josh, I think maybe I can answer some of that and Tony you can answer some of it as well. Josh, we have a roadmap that we have to go through with the FCC in order to meet the grading criteria and those grading criteria are dual mode devices and so forth. All of which and in the process of preparing now for submittal, we have to meet those criteria in order to be able to rollout any ATC devices which we intend to do.

As you are aware we have changes to our ground infrastructure as well, which are upcoming for Globalstar and as we transition from the first to the second generation and so we'll make certain that we accommodate the ATC gaining requirements both from a first and second generation perspective. Tony do you have anything else that you would like to add also.

Tony Navarra

Well Jay I would add in answering Josh's question that we work very close fully with the NTIA in making certain there are CPE both for the satellite segment as well as that which will be used on the open range side to met all of the interference and the power both transmission and reception to the handset.

And we were very confident that working with a couple of the different major manufacturers that we will be able to deliver CPE that provide services both to a roll American subscribers as well as operate very well on the normal goal strain assessors.

Jay Monroe

Josh does that get to your question?

Josh Burman - Analyst

I think so, on more I think sort of what announcement we'll be looking for it's a set of submissions to the SEC coming up in the next couple of months and then a device announcement middle of next year.

Jay Monroe

Yes I think at this point the first rollout of devices are scheduled for the fourth quarter of 2008. Although between now and then there will definitely be rollout of test quantities of various things and I guess we can look forward to announcements on that as well Josh.

Josh Burman - Analyst

Okay. Great. Thank you very much.

Jay Monroe

You're welcome.

Operator

Your next question comes from the line of Aaron Chan with Criterion. Please proceed.

Aaron Chan - Criterion

Hey guys couple of questions. First one is the thermo financing result of Wachovia deploying it finally got agreement.

Jay Monroe

No Aaron. This has more to do with allowing the company having unfettered access to their capital over the next year or so as it is funding its CapEx plan.

Aaron Chan - Criterion

Okay. And then second question how many subscribers do you think of need in order to obtain kind of $0.30 to $040 per megahertz talks about.

Jay Monroe

How many subs will they need?

Aaron Chan - Criterion

Yes because I think you mentioned that is part of it variable in '08.

Jay Monroe

That's a fair question I do not have that information with me. I have reviewed it in the past and I remember looking at it and feeling like it was very, very conservative the ramp was very slow for instance I do recall the first year and first year only had 8000 subscribers in a total.

So this is not a massive deployment that yields these numbers. It's a very successful deployment for open range because it's a very economical technology they intend to deploy and when you go small cities you can do them often with a single or sometimes two base stations.

So it's a relatively slow ramp that are using to be conservative under their loan agreement and not a huge number of ultimate subscribers on the system. Now they cover a lot of subscribers on the net how we are calculating things but it doesn't require an enormous amount of subscribers on their system in order for them to be very successful.

Aaron Chan - Criterion

Okay. Got it. And how does the ATC work if you lead to a communication under satellite if they plan on actually next year for some on the efficiency you lose the two way communications service will ATC still operate or how does that work?

Jay Monroe

Well we have to satisfy the requirement at the SEC at all times and if this deployment is really beginning in earnest at the end of 2008 and our earliest deliveries of second generation satellites come in the end of the first quarter of 2009.

Its not considered to be much of an issue on our but if the SEC saw differently for whatever reason we would have to seek a waiver from them.

Aaron Chan - Criterion

We will not have…

Jay Monroe

Our two-way service will never seize. It may have more GAAP than we would like but it will not seize.

Aaron Chan - Criterion

Are you currently about operating ATC with GAAP in their two way service.

Jay Monroe

Yes.

Aaron Chan - Criterion

Okay. And then final question on the pricing that you are talking about, significantly higher rates urban and suburban areas. The services isn't really work in urban areas, why do you think you get better pricing there?

Jay Monroe

The pricing that we were describing Aaron is for the spectrum component of our business and if you build out a WiMAX system, presumably in a major metropolitan area where there are more customers you can command a higher price for someone using that spectrum with you.

The fact that it has to meet gating criteria, and operate in an ATC fashion over the satellites as well as over the ground infrastructure does not necessarily mean that in the middle of the downtown major metropolitan area the people would use very much of the satellite service itself. They'll use more of the terrestrial WiMAX system.

So what's unique about this, is if you think about rural American, he now has a piece of CPE and that will ultimately be reduced to just to plug-in in the side of your laptop and when its in that configuration, those in rural America actually are the first to get the best services because they'll have the wireless hi-speed WiMAX service, where they're inside that footprint, but then as they go outside of that footprint they still have connectivity.

A guy in New York City, that's on a WiMAX system maybe doesn't have connectivity as soon as he leaves New York City, if rural WiMAX in New York City. But a rural American will now be connected through the satellite systems.

So wherever he goes, that CPE if it's with him can access the satellite system. So it doesn't matter any longer whether he is in; Milford, Ohio, or Mongolia. He can be connected to the Globalstar System or to a WiMAX system. And so, it's a really unique bit of long term CPE that's available for customers that historically have not been treat as quite as well.

Aaron Chan - Criterion

Thanks, guys.

Jay Monroe

Sure. Thanks.

Operator

Your next question comes from the line of Jonathan Chaplin with JP Morgan. Please proceed.

Jonathan Catherine - JPMorgan

Hi. Thanks for giving me a second question. Just one thing, I wanted to follow up on, in your prepared Jay you mentioned you're in talks with a number of different parties and it sounded like from range it was just the first deal that you've managed to negotiate and strike?

And its sounds like now that you have a tenth place, did the negotiating process for future deals might be a little simpler. I am wondering, if you could give us an idea of other discussions you might be having, how far away the next deal like this open range deal might be? You know any context for what other deals might be in the pipeline will be very useful?

Jay Monroe

At this time Jonathan, I can't give you additional context. I can agree with you entirely that after having been through this, that it will be much easier for us to do work in the future with other parties. But as the folks at open range in Globalstar have blazed a new trail in terms of what was necessary in order to document in transaction like this.

And it was a very lengthy, extraordinarily cooperative process but we unearth have dozen issues that we would never have thought of day one. So in the future its should be far easier. But the other conversation that we're having are conversation, which are nascent and we're optimistic that we will yield additional ones in the future. I don't have a timetable format at this time.

Jonathan Catherine - JPMorgan

Great. Thanks, Jay. I appreciate that.

Jay Monroe

You are welcome.

Dean Hirasawa

Hello operator, we are running short of time so when we take one last question and then we will end the teleconference.

Operator

Okay. Your final question comes from the line of Keith Wang (ph) with Callisto Capital. Please proceed.

Keith Wang - Callisto Capital

Hi guys. I have a questions for you with regards to the role on the spot, could you give me some indications or idea of typical SG&A ramp that we should see this from the selling performance?

Fuad Ahmad

Sure Keith. Let me give you a little bit of color around that. As you, as we have pointed out in the prepared remark that we are selling the product to the end-user currently at approximately $169. We expect as a company to make some way around 30 to 35% margin on that product.

We intend to cover our sales in marketing cost with that equipment margin and that is typical for a product of this nature at this cost and it's typical for a product sold through Big Box and through on the retail channel that we intend to sale through.

Jay Monroe

And then however, Keith the next step is the service revenue. What Fuad described is the equipment revenue. The service revenue, which is in two plans either $100 year or $150 year depending upon what you buy, represents probably 90% margins to us.

And so for Globalstar, the way we conceptualize it is the equipment itself covers all of our SG&A, ancillary, cost that is lot of advertising associated with going out to as many channels as we intend to be in the service revenue represent the profitability to us.

Keith Wang - Callisto Capital

Okay. Excellent. One last question on the ATC the dealings with open range will that incur before as to the NPRM came out?

Jay Monroe

It began many months to ago Keith and so it was done almost exactly at the same time at the NPRM was release from the FCC.

Keith Wang - Callisto Capital

So, that means that they're actually planning on the minimum nano-spectrum to do the initial rollout?

Jay Monroe

Yes, they contracted for the spectrum in a way that allows them to step into to larger and larger pieces of it as the business model builds out. But arrangement with them is dependant upon completion of the NPRM in at the FFC.

Keith Wang - Callisto Capital

Okay. Great. Thanks.

Jay Monroe

Thank you.

Dean Hirasawa

With that, we'll bring the conference call to an end. Thank you, again, for joining us. And please be reminded that latter this afternoon in audio recording of the conference call will become available via telephone dialing, and the webcast recording will also be available on Globalstar's website. Thank you and good afternoon.

Operator

This concludes today's presentation. You may now disconnect. Everyone have great day.

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