Dean Hirasawa – Director, Public and Investor Relations
James Monroe, III - Chairman of the Board and Chief Executive Officer
Fuad Ahmad - Chief Financial Officer and Senior Vice President
Anthony J. Navarra – President, Global Operations
Globalstar, Inc. (OTCQB:GSAT) Q2 2008 Earnings Call August 11, 2008 5:00 PM ET
Welcome to the Globalstar earnings conference call. (Operator Instructions) I would now like to turn the call over to Dean Hirasawa, Director of Public and Investor Relations.
Thank you for joining us for today’s conference call to discuss the results for Globalstar, Inc. for the quarter and six months ended June 30, 2008. Before we begin please note the following. This call may contain forward-looking statements within the meaning of Federal securities law. Factors that could cause results to differ materially are described in the Safe Harbor section of today’s press release and in Globalstar’s SEC filings including the quarterly report on Form 10-Q for the three months ended June 30, 2008 which will be filed later today.
Both the press release and this conference call include discussions 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 Monday, August 11, 2008. Today’s press release containing certain financial information is available on the company website at www.Globalstar.com. Later this afternoon an audio recording of this conference call will be available via telephone dial in and a web cast recording will also be made available on the company’s website.
Presenting today will be Jay Monroe, Chairman and CEO of Globalstar, Inc.; Fuad Ahmad, Senior Vice President and CFO; and Tony Navarra, President of Global Operations. Also joining the call today is Thomas Colby, Chief Operating Officer of Globalstar. All four gentlemen will be available following the prepared remarks to take questions as time allows.
At this time I would like to turn the call over to Mr. Monroe.
James Monroe, III
Thank you all for joining today for Globalstar’s quarterly earnings call. There is now less than one year to go before we take delivery of our first second generation satellites and as a result we have been extremely busy here at Globalstar. There’s a lot of material to cover so let’s begin.
Before discussing the four areas of the business which we update quarterly let me mention where Globalstar sits within the now rapidly changing wireless telecomm state and what that means for our satellite business. As everyone knows the global market or wireless voice and data services is growing rapidly. Today roughly 3 billion of 6 billion people in the world have mobile phones or mobile data devices and last year there were 700 million sold compared to only 200 million computers. What we’re living through is a computing shift from the desktop to the mobile device as mobile phones become ever more capable.
As many emerging markets once skipped over land line phones altogether and went straight to wireless because the wireless infrastructure was so much less expensive so fast sections of the world today are beginning to skip the computer altogether and go straight to less expensive mobile computing devices. So called smart phones are growing at approximately 100% per year as evidenced by the extraordinary success of the iPhone and the Blackberry which are basically just small computers. Everywhere productivity and rise in GDP are directly linked to the availability of good communications and the availability of reliable data systems. Nowhere is this more true than in emerging and remote markets.
For people outside of terresterialist wireless range all of these services can now go over Globalstar’s network in part because the consumer devices can shortly be manufactured cheaply enough to economically address markets such as China, India and sub-Saharan Africa. Additionally our spectrum can be used by terrestrial wireless companies to augment their own where they might be spectrum constrained. Only a relatively small percentage of the world’s land mass actually has wireless and cellular infrastructure. This where Globalstar comes in. Our access to those un-served areas and the 3 billion people who are currently unconnected costs about 1/100th of a wireless terrestrial build out to un-served populations. This makes Globalstar a true low cost provider of voice and data and sine our system is 850 miles in the air it is relatively immune to the geo-political and natural disaster risks affecting terrestrial wired or wireless networks.
Over the past few years we have been planning the new Globalstar compilation and the supporting technologies around it. We believe that the growth and the collusion in the global wireless business has favorably changed the traditional MSS to voice and data marketplace. Globalstar recognizes change and responded with new low cost wireless product such as the SPOT Satellite Messenger which we saw launched late last year. Also recognizing the potential to enhance that business we have contracted with Hughes Network Systems to design new, low cost chip sets to power our new products. Far from the past when satellite phones and data devices were large and expensive this revolutionary new chip set will be available for a fraction of the cost previously associated with integrated satellite capability.
To enable this multi-mode technology we will be licensing the chip sets at a nominal cost to anyone who’d like to embed satellite connectivity into one of their devices. This creates a convergence at the device level of both wireless and satellite voice and data capabilities and we expect this to make satellite access available within other’s devices for as little as $20 of added material cost. We expect to also offer the world’s most cost effective satellite only handsets to our commercial and industrial markets based upon our new Hughes architecture. These are just a few of the reasons why we are so bullish about Globalstar’s future.
Now for second quarter highlights, I’m pleased to announce that Globalstar grew tremendously during the second quarter. We added 23,000 net subscribers during the quarter, 2.5 times greater than the 9,100 subscribers added during the previous quarter. By adding new customers and continuing to retain our core customer base, Globalstar completed the month of June with approximately 316,000 subscribers. During the quarter we also completed a convertible note offering and improved our cash position ending the quarter with available liquidity of approximately $180 million. Throughout the quarter Globalstar continued to build the consumer retail acceptance of the SPOT Satellite Messenger products and services as expected. We expanded the availability of SPOT to over 5,000 stores by the end of the quarter and as of today we’ve shipped or have commitments to ship more than 70,000 units. I’ll provide additional SPOT developments shortly.
Those are just a few of the highlights. Now as we’ve done in the past let’s update four areas which are key to Globalstar’s long term business success. First the status of the manufacture and the launch of the second generation constellation is an area which Tony will cover momentarily. The second area of quarterly focus relates to our Simplex data and SPOT products. Many of our commercial customers use Simplex products and services for asset or personal tracking, fleet management and data monitoring applications. The Simplex network continues to provide high quality and extremely reliable messaging four customers. We are working with several Simplex data integrators who continue to develop and introduce Simplex solutions to the market. For instance our Mexican [iGo] is now offering a multi-mode tracking device which operates over GSM, GPRS and our Simplex network. In Mexico this is targeted at the consumer automobile theft recovery marketplace but the product has application worldwide. Because it’s a hybrid product using both terrestrial wireless and satellite messaging it’s an example of the convergence I mentioned at the outset.
On the SPOT front we provide customers with the ability to send a message for help with the push of a button and because it contains a GPS receiver it can let rescue workers know where to pinpoint a person in trouble. Subscribers can also track their location and permit friends, family or employers to track their location using Google Maps. We have recently signed SPOT Affinity agreements with domestic organizations such as Boats US as well as the world’s largest online motorcycle and ATV communities. These agreements provide us direct communication and promotional access to their hundreds of thousands of members. Many more Affinity groups such as these are expected to sign agreements soon.
Recently we have been discussing how social networking sites might be able to integrate SPOT’s geo-location and tracking capabilities. We are pleased to announce that SPOT users can now share their GPS location coordinates using Yahoo! Fire Eagle. Fire Eagle is an open platform that acts as a simple and secure way to connect location data with other websites and services. At the moment Fire Eagle is in beta integration and can be accessed by invitation only. However it specifically enables SPOT users to publish their GPS location to the web sharing their location with their favorite social networking sites. We’ll be talking to you more about this in the future.
Internationally, SPOT is now available at the more than 450 Canadian tire retail locations and we are finalizing details for a distribution agreement in future shops 220 electronics retail stores across Canada. In France we signed an agreement with European sporting goods retailer Decathlon representing nearly 400 stores and we’re about to launch SPOT in Brazil. Our international gateway operator in Australia has just agreed to market SPOT joining Mexico which launched SPOT earlier this summer. Since the beginning of the year we have collectively grown the addressable market for SPOT by more than half a billion people outside of the United States and Canada.
During the second quarter we continued to expand our global Simplex coverage. We followed up our first quarter installation of an appliqué in Brazil by adding new appliqués to gateways in both Alaska and Singapore. This expanded Simplex data coverage to all of Alaska, the surrounding Pacific, the Arctic Ocean, the maritime regions and a significant portion of Southeast Asia. Most importantly our success with SPOT differentiates us from our MSS competition. No other mobile satellite services provider has successfully conceived manufactured and brought to market an MSS product designed for the consumer marketplace. By expanding both the coverage and the availability of SPOT we continue to broaden the addressable market for this product as well a for future SPOT derivative products.
The third key area of our business which I update quarterly concerns worldwide spectrum opportunity. On April 10th, the FCC granted Globalstar expanded authority to use an [inaudible] of up to approximately 20 megahertz of our L and F span spectrum for ancillary terrestrial component or ATC service. This enables Globalstar to partner with a number of wireless industry service providers for a broad range of new communications services to un-served or under-served customers. In its decision the FCC stated this action will allow greater subscriber capacity and flexibility for ATC and will allow Globalstar to provide improved service to customers particularly in rural areas of the United States.
This decision provides our current ATC partner Open Range Communications with the ability to proceed with plans to develop and offer innovative wireless services in conjunction with our satellite services. During the second quarter Open Range and Globalstar continued development of their ATC product. These dual-mode devices will be capable of providing wireless data using WiMax and Open Range’s service areas or Globalstar’s Simplex data service outside of those areas. We anticipate this certification shortly. On a worldwide basis other regulators are implementing or considering ATC like proceedings. We believe opportunities will exist for similar certifications in Europe, Canada and elsewhere internationally.
Fourth and finally let’s discuss our latest global initiatives. During the quarter we continued the strategy of constructing new Globalstar ground stations in order to expand the geographical area to which we can market our products. As mentioned we have signed agreements with a number of our independent gateway operators for SPOT, Mexico has already launched it and our service provider in Australia has signed a distribution agreement and we expect to begin delivering the product sometime into Australia during the current quarter. The purchase of the Brazilian service provider announced earlier this year paved the way for us to expand both Simplex and Duplex data coverage into South America. This of course was a precursor to launching SPOT in that marketplace.
In early June we announced that the installation was completed at our new gateway in Singapore. This gateway will be operated by Singapore Telecommunications or SingTel and will serve significant parts of Southeast Asia. User training been completed and trials for products including SPOT have commenced. The gateway is on schedule to begin commercial service in September. Lastly we continued the discussion with several of our [iGO]s about the purchase of their gateways. We are also evaluating opportunities worldwide for the construction of gateways to be owned by us where we can expand our footprint.
Now I will turn the call over to Chief Financial Officer, Fuad.
Let me begin by stating that our aggressive focus on subscriber retention, the growth of our Simplex business and sequentially stable revenues remained firmly on track. We ended the second quarter of 2008 with 315,911 total customers in our system an increase of 22,652 from March 31, 2008 and 31,785 from December 31, 2007. For the three months ended June 30, 2008 we had $16.7 million of service revenue and $16 million of adjusted service revenue compared to $16 million and $16.9 million respectively for the first quarter of 2008. Year-to-date service revenue and adjusted service revenue were $132.7 million and $32.9 million respectively.
For the three months ended June 30, 2008 equipment sales revenue was $6.3 million compared to $6.1 million for the first quarter of 2008. Year-to-date equipment revenue sales was $12.5 million. Total operating expenses for the quarter ended June 30, 2008 were $35.1 million compared to $33.7 million for the first quarter of 2008. Net growth in operating expenses was due primarily to an increase of $1.1 million in the cost of services related to the acquisition of our independent gateway operator in Brazil, higher second generation research and development costs as well as increased depreciation and amortization expenses of $1.1 million. These cost increases were partially offset by lower costs of subscriber equipment and decreased MG&A expense.
Operating expenses for the six months ended June 30, 2008 were $68.8 million. For the quarter ended June 30, 2008 we recorded an adjusted EBITDA loss of $2 million compared to an adjusted EBITDA loss of $1.5 million for the first quarter of 2008. This slight decline in adjusted EBITDA is related to certain second generation research and development expenses and our aggressive and successful SPOT rollout program. Adjusted EBITDA loss for the six months ended June 30th was $3.5 million. We reported retail ARPU of $38.57 and adjusted retail RPU of $6.63 or the quarter ended June 3, 2008. This compared to $38.14 and $40.28 respectively for the first quarter of 2008.
Year-to-date retail RPU and adjusted retail RPU was $38.36 and $38.45 respectively. Moreover our retail monthly insurance for the first six months of 2008 was 1.5%. Cash capital expenditures for the construction of our second generation system were approximately $128 million for the first six months of 2008. Finally we ended the second quarter of 2008 with available liquidity of approximately $179.6 million.
With that I’ll turn it over to Tony.
Anthony J. Navarra
Globalstar’s constellation of 48 operational satellites continues to provide service with operating parameters designed to maximize the quality of service to our worldwide subscribers. Our Simplex and SPOT satellite messenger customers continue to receive a greater than 98% messaging reliability and no interruption or degradation in service. We continue to move toward the launch of our second generation satellites and the expected return to the standard robust levels of two-way voice and data services. These services are currently being optimized for subscribers through the use of the OSAT tool which continues to provide our customers with a 95% connectivity probability.
We’re pleased to announce that we have recently completed upgrades to the OSAT increasing both its functionality and ease of use. We hear from our customers that our duplex voice and data service availability has improved with the addition of eight new first generation satellites launched in May and October of last year and our own tests confirm that service reliability is greater. As predicted the last of these eight first generation satellites became fully operational in June. As Jay indicated earlier Thales Alenia Space has made significant progress in designing and constructing our second generation satellites. Four years after beginning our second generation discussions Thales has now commenced sub-system assembly, integration and test of our initial production satellites.
Thales Alenia Space and Globalstar are very excited about this new phase or next phase of our satellite production and therefore we are pleased to announce we will be holding an event for investors and the press at the Thales facility in Cannes, France on August 26th. This event is significant to Globalstar as it exhibits important and concrete results of the progress of our satellite and constellation replacement strategy and effort. We are doing what we said we would do and when we said we would do it. Staying on schedule provides us the opportunity to integrate the new satellites into our current constellation as quickly as possible. We also continue to expect that our second generation constellation will begin operational service in
2010 thereby restoring high quality voice and data services to our loyal duplex customers. And, with the 15 year design life of the second generation satellites, our space segment will be fully operational through at least 2025 at a fraction of the cost of Global Star’s original constellation.
At our investor event on August 26th we will provide the latest satellite updates, answer questions and provide an opportunity to tour the Thales Alenia Space facility where you will be able to view our first production satellites. Those of you on this call and your colleagues are invited to meet with us and participate in figuratively kicking the tires of our first production satellites that will begin qualification testing in September. If you are interested in more information, please call Dean Hirasawa at 408-933-4006 or send Dean an email at Dean.Hirasawa@GlobalStar.com.
Thales Alenia Space manufacturing and [inaudible] upper stage design process has been excellent. Thales has been working closely with us for a number of years and we’re happy to report that the payload critical design review or CDR is now complete. The payload engineering qualification model testing is underway demonstrating excellent performance margins relative to the specifications. All unit CDRs are ready for system testing on schedule to begin in October of this year. We anticipate beginning assembly integration and test of the first production satellites in January, 2009 in [Rome]. We expect these preparations will result in satellites being shipped in June or July of next year for launch from either Karu in French Guyana or Baikonur Kazakhstan for launch in the third quarter of 2009.
Updating you on our launch vehicle progress, Global Star and Arianespace in July conducted a successful rampe, or preliminary mission analysts meeting where all participants discussed the SOYUZ, [frig] at upper stage and the new satellite dispenser design integration. A dispenser preliminary design review and launch operations meeting held in July. Good progress was reported by the Globalstar team that met with the experienced Starsem and Arianespace personnel. Supplies and materials for the completion for the SOYUZ launch pack in Peru set sail from St. Petersburg on July 9 and has just recently arrived on site in French Guyana. Russian work crews are scheduled to arrive in August and begin work. Arianespace continues to work closely with Globalstar, Thales Alenia Space in preparations for our first launch of six satellites scheduled for the first quarter of 2009. Our launch contract with Arianespace signed in September of 2007 included a launch base selection option. We anticipate our final launch site selection decision will be made in late September 2008 after a site survey is completed.
With that, let me turn it back to Jay for some closing comments.
James Monroe, III
As Tony recently reminded a member of the press, Globalstar has a current and contracted future ground segment, we have a current and a second generation space segment and we have the world’s largest existing MSS voice and data customer base. We expect both our customer base and our revenues to grow dramatically once our new satellites are operational and the new ground infrastructure is rolled out. As you know, every company has to replace its satellites sometimes, it’s just the nature of space craft. Unfortunately for us, some of our capabilities declined before our new constellation was ready for launch.
However, once of our largest MSS competitors does not expect its new constellation to be fully operational until 2016. Therefore, we will have the field for truly advanced mobile satellite services to ourselves for roughly seven years, assuming they eventually find a way to raise the $2.7 billion of necessary funding they indicate is required. If they should fail to do this, in time, they may experience the same challenges that we have endured. If they are late in deploying the second generation, we will have a longer period without serious competition. In either case, we expect to aggressively market cost effective high value products and services and fully reassume those competitive advantages that helped us establish our leadership position in this industry.
In closing, I’d like to elaborate on something I touched upon earlier. Since January of this year when SPOT was highlighted at CES, the product as garnered awards and accolades from both media and users alike. Since that time, we have shipped or have commitments to ship more than 70,000 units and have established over 5,000 points of retail distribution. SPOT has been featured on countless blogs and on numerous media including The Wall Street Journal and The New York Times. It has been seen flying around with CNN’s Miles O’Brien and was presented early this summer on ABC’s TV The View. More importantly, from Alaska to Northern Europe to Tasmania, SPOT’s unique satellite messaging and tracking capability has helped save more than a dozen lives.
While all this was taking place, Globalstar was effectively becoming the world’s first mobile satellite service provider to conceive, design and successfully distribute a MSS product to the mass consumer marketplace. I cannot over emphasize how important this is to the long term evolution of GlobalStar. The growing success of SPOT clearly defines a new market for our products and services, one which completely differentiates us from our competition. No other MSS company has successfully introduced a high margin, high utility satellite product that can be sold to the average consumer for $150. Globalstar intends to do this continuously new product, after new product, for the foreseeable future.
Historically, all MSS providers, including ourselves have built our business by selling products predominately to niche commercial and business users. We and others have successfully demonstrated that this business model can result in annual revenue and subscriber growth of between 30% and 50%. In fact, we expect to return to those markets and to that growth rate in them once we begin launching our second generation constellation in just over 12 months. Then, we will add our historic business success to our new consumer retail success while continuing to innovate with additional low cost offerings.
I’d like to thank you again for joining us and I look forward to speaking with you again in about three months.
That concludes the prepared portion of the presentation. We will now take an opportunity to answer some questions.
I show no questions in queue at this time.
With that, we will bring the conference call to an end. Thank you again for joining us and please be reminded that later this afternoon and audio recording of this conference call will become available by a telephone dial in and a webcast recording will also be available on the Globalstar website. Thank you and good afternoon.