Globalstar, Inc. (NYSEMKT:GSAT) Q1 2014 Earnings Conference Call May 7, 2014 5:00 PM ET
Jay Monroe - Chairman and CEO
Rebecca Clary - CAO and CC
Steve Sweeney - Elevation
Jason Bernstein - Odion Capital
John Petrozzi - Muller Road Capital
Welcome to the Globalstar Incorporated First Quarter 2014 Earnings Conference Call. My name is Joe and I’ll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Please note that this conference is also being recorded.
I’d now turn the call over to Kathryn Singer. Ms Singer you may begin.
Thank you, operator. Good afternoon, everyone. Thank you for joining us for today’s conference call to discuss Globalstar’s three month results for the period ended March 31, 2014.
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, May 07, 2014. The first quarter 2014 press release that was issued this afternoon, which contains certain financial information, is available on the Company web site at www.globalstar.com. Later today an audio recording of this conference call will also made available via telephone dial-in and a webcast recording, along with the copy of the slide presentation will also be made available on the Company web site.
Today’s call is being presented by Mr. Jay Monroe, Chairman and CEO; and Rebecca Clary, Chief Accounting Officer and Corporate Controller.
Now it's my pleasure to turn the call over to Jay.
Thank you all for joining us today, and good afternoon. Given that we provided a full company update less than two months ago on the annual call, I’ll ask Rebecca to update the Q1 financials. After that I’ll provide a brief look at some important operational initiatives. Allow me to turn the call over to Rebecca.
Thank you, Jay and good afternoon everyone. I am pleased to report that we continue to make solid financial improvements while also improving our balance sheet and liquidity positions. Adjusted EBITDA grew substantially from the first quarter of 2014, due primarily to an increase in revenue. Most notably all major Duplex metrics including a ARPU, service and equipment revenue and subscriber additions have shown growth compared to the same period in 2013. As we begin the first full year with historic service levels these data points shows a Duplex performance continued to revamp.
As shown on slide three, total revenue was 20.5 million for the first quarter of 2014, up 6% compared to the first quarter of 2013. This increase was driven by growth in both service and acrimony revenue, specifically an improvement in Duplex service revenue, and increases in Duplex and SPOT equipment sales. Consolidated service revenue increased 6% to 16.2 million during the first quarter 2014 driven primarily by the improvement in Duplex ARPU and an increase in asset subscribers. Equipment revenue increased 9% to $4.3 million compared to the same period 2013 due primarily to an increase in the volume of units sold throughout the company Duplex and SPOT product lines.
The increase in total service revenue was due almost entirely to our Duplex line of business driving the 21% increase in Duplex service revenue with an increase in revenue generating subscribers combined with an increase in the average rate plan used by these subscribers.
ARPU also increased substantially during the first quarter. The increase in ARPU was impacted by a significant reduction in low revenue generating subscribers and a 13% increase in high revenue generating subscribers. Over the past several quarters we have discussed with you our continued process of cleansing our subscriber base. During the first quarter these efforts culminated in the deactivation of over 26,000 Duplex subscribers. Similar to the cleanup of the SPOT subscriber base in the first quarter 2013, the subscribers who are either not paying or were producing little to no revenue as they are on legacy plans, that were clearly usage-based, and they were not using our devices.
Concurrent with the restoration of quality QA service, we have initiated more aggressive collections procedures and reengagement campaigns. The success of these programs has driven a material improvement in the number of revenue generating subscribers which while creating unusually high churn levels. We believe that this adjustment gives the company an [indiscernible], improved visibility and to the breakdown of the subscriber base. This cleanup process involves carefully planned win back efforts including re-engaging the legacy subscribers and educating them about our recent accomplishments including the restoration of high-quality Duplex service.
We targeted our resources towards active using subscribers while softer marketing efforts was focused on low subscribers who are not heavy users and therefore were less likely to convert as they were more cost sensitive. Over the past 12 months our horses of migrating legacy subscribers to current rates plans had led to the conversion of over 15,000 subscribers to higher rate plan. We’ve also successfully added over 16,000 new customers to network. Excluding roughly 26,000 deactivations from the current and prior year average subscriber numbers, ARPU increased 20% from $28 to $34 from the first quarter of 2013 to 2014.
With a clean subscriber base across all of our core lines of business, we expect to return to our historically low churn levels which has been more difficult to discern in the past. As well as for ARPU metrics, that more accurately reflects the average revenue our subscribers generate each month.
Subscriber equipment sales increased 9% to $4.3 million in the first quarter of 2014. This increase was driven primarily by a 22% increase in Duplex equipment revenue and a 54% increase in SPOT equipment revenue. These increases were offset by a 20% decrease in commercial Simplex equipment revenue.
The first quarter of 2014 benefited from sales of new products launched in the past months including this SPOT Global Phone, SPOT Gen3 and SPOT Trace. We continue to see strong market acceptance to these new products, and mostly continue to drive interest from our distribution partners with soon to-be-release released Sat-Fi technology.
The substantial increase in net loss compared to the first quarter of 2013 is primarily attributable to non-cash items; the largest of these items was $210 million fluctuation in derivative valuation adjustments from a gain in the first quarter of 2013 to a loss in the first quarter of 2014.
The significant loss reported during the first quarter of 2014 was due to be over 50% increase in the stock price during the quarter. Also driving the increase in net loss was a $10 million loss in extinguishment of that which represents the excess of the fair value of the stock issued to converting note holders over the carrying value of the notes converted during the quarter. Other items including higher depreciation and interest expense continue to contribute to the increase in net loss.
Adjusted EBITDA increased over 50% to $3.8 million during the first quarter of 2014 compared to the prior year’s first quarter. This increase was driven by a $1.2 million increase in total revenue coupled with $0.1 million decrease in operating expenses excluding EBITDA adjustments. As was discussed, we continued improvement in our Duplex business and the success of newly launched product drove the increase in total revenue. The slight increase in operating expenses was due to additional cost savings as a result of our continued focus on reducing network related expenses, offset partially by higher sales and marketing expenses in the first quarter of 2014.
And now an update on the Company’s liquidity position. As of March 31, 2014 we held an unrestricted cash balance of $19.6 million with no additional charge made under the Terrapin equity lines, $24 million remains available to us through May 2015. Also, approximately $5 million remains available under the funding bad stock committed by Thermo, and we continue to retain approximately $38 million in the debt service reserve account which is restricted to make payments towards principle and interest amounts due under the COFACE Facility.
Another source of liquidity has proceeds from the exercise of warrants. Warrants purchased approximately 48 million shares of our common stock will expire ending of this year. If all of these warrants should be exercised on a cash basis, the proceeds will provide an additional 12.8 million to the company.
Our contractual obligations during next twelve months include primarily debt service payment and capital expenditure obligations. Our debt related payments include the first principle payments due under the COFACE Facility agreement of $4 million in December 2014 as well as semi-annual interest payments due under the facility agreement and a 2013 8% notes which in aggregate are estimated to be $20 million.
Our capital expenditure obligations which are predominantly to support our gateway related effort, are estimated to be 24 million to year end. Consistent with our previous agreement our ground vendors continue to express interest in accepting stock in lieu of cash for future milestone payments. However, there are currently no contractual payments by either party regarding method of payment. We also continue to delever our balance sheet. Last month, the remaining 38 million outstanding principal amounts of our 2009 8% convertible senior notes converted into equity. This conversion resulted from our stock price closing for 30 consecutive trading days at about 200% of $14 exercise price underlining these notes. The conversion also eliminated the associated derivative viability through our balance sheet.
Looking forward, we continue to see growth in our four MSF business. Key metrics including increasing ARPU, improving phone sales and rising minutes of use, all continue to improved and indicate strong future revenue growth. We have also successfully launched four new products over the past 12 months and look to continue these efforts. And as we’ve discussed with you in the past, for gateway repair in our existing markets and expansion into new markets, we continue to focus on what we believe are vital opportunities in various international regions which will further supplement our current growth trajectory. I will now turn the call back over to Jay.
Thanks Rebecca. I’d like to start by welcoming any new investors to the call who’ve become shareholders following our New York Stock Exchange listing last month, we are proud to partner with the NYSE MKT and to once again trade on a national exchange. In only a few short weeks, we have seen increased institutional investor interest and look forward to the robust platform provided by the exchange; we believe all Globalstar investors will benefit from the increased liquidity complemented by the NYSE designated market maker model. This morning we announced that SPOT has just eclipsed 3000 rescues worldwide since its introduction. We are now averaging well over one rescue each day and if history is any teacher someone’s life will be saved before sundown today. All of our employees come to work each day knowing that we’re having this type of impact and bear this responsibility and it’s a primary reason why we continue to innovate so curiously in this product area. As Rebecca just outlined we have returned to growth in improving EBITDA which has come through a combination of simplifying the way that we run the business and focusing on our core strengths, more recently we’ve also expanded our focus to include territories outside of North America where historically we have relied primarily on wholesale distribution partners. With an increasing portfolio of assets abroad and a strategy to optimize interoperability between geographies, future growth will be driven by the continued resurgence in North America couple with international growth. International is essentially a greenfield of opportunity for us.
As one example of the markets abroad, we are excited to announce today that Globalstar together with our value added reseller V-Smart recently won a competitive bidding process to deploy commercial Simplex to the Ecuadorian fishing fleet. This government program provides for enhanced tracking and safety for Ecuador’s maritime fishing industry. This new product is a combination commercial grade tracking device coupled with SPOT’s life saving SOS features. While we won’t see the benefit of this from an EBITDA perspective until the units are actually installed we’ve shipped an initial 5000 devices with 6000 more to be shipped over the next few months. This opportunity could include another 10000 units by year end. The bidding process was very competitive and we’re pleased that Globalstar was able to demonstrate its superior offering. With a focus on Brazil, Central America and Europe we expect continued expansion of international revenue as we increase our direct and indirect sales channels. As we expand internationally our partners are expanding with us, for example Geoforce one of our largest M-M customers serving primarily the oil and gas industry has recently opened offices in South America and Europe to offer a suite of asset tracking capabilities over the Globalstar network, we look forward to their continued growth as they leverage the industry expertise they developed in the United States and now are broadly exporting.
From a seasonality perspective, Globalstar’s high selling season is the second and the third quarter of each year. Coinciding with this period we recently launched a renewed marketing and advertising program. While sales and marketing were not the primary focus from a capital allocation perspective during the network reconstruction period, we have not shifted our efforts to a sales first orientation, this will be the first full year where we are able to market the relaunched constellation and expect material growth in our voice and data businesses. While we have become a more diversified company now including our SPOT family of products and commercial Simplex we expect voice and data to be a significant growth driver over the coming quarters and years. Product development has been an important focus for the company in the past; we innovated first with the introduction of SPOT several years ago and continue to introduce products that expand the relevance of MSS by reducing cost, form factor, and improving functionality in ever flexible applications. The Sat-Fi device has been the central focus of our recent development effort, it provides satellite connectivity to any Wi-Fi enabled Smartphone with a simple app but without any hardware upgrades to a user’s existing phone, in other words you continue to use your own device of whatever manufacturer you prefer, with your own phone number, your own directory, your own e-mail and texting history. We expect our first shipments of Sat-Fi late in the second quarter to commercial and government customers initially. Consistent with the core mandate of our research and development themes we will continue to reduce the cost and form factor of Sat-Fi over time and believe that it will become an attractive consumer product once we are able to utilize our use base chip and ground infrastructure beginning late next year.
A topic that’s top of mind for many around the world as a result of the Malaysian air mystery is Globalstar’s planned deployment of a space based air traffic management system, complementing automatic, dependent, surveillance broadcast, or ADSB. ADSB is a replacement for global aging radar infrastructure and offers the superior aircraft tracking capabilities. Current ADSB is limited to ground based systems which require your line of sight between the receiver on the ground and the plane in the sky. Globalstar space-based solution augments this delivery path but is not subject to the limitations of ground based systems. Globalstar solution is called ATSP-link augmentation system or ALAS. ALAS provides a complimentary enhancement to normal ADSB transmission and it’s a technology that our partner ADSB Technologies Inc has been test flying successfully for two years now.
We expect FAA certification during 2015. Also the Globalstar solution is superior to the competitive alternatives since ours doesn’t have 15 second to a one minute delay in delivering the airplane’s coordinates among other advantages. Our guide is delivered within a couple of hundred milliseconds. Long transmission delays can be deadly when a plane is flying at 550 miles an hour. Our solution can provide tracking, each and every second, so the exact aircraft location is known at all times. This real-time capability significantly improved safety, air traffic coordination, and fuel efficiency, by allowing commercial aircraft to fly more direct routes. Our system also benefits from a newly completed state of the art satellite constellation, the ability to test equipment today without years of delay, and material advantages and equipment cost versus the competition. We look forward to receiving certification and to continuing our work to become the world’s space-based ADSP standard.
Let’s move on now to update the SEC’s notice of proposed rulemaking. On Monday of this week, we completed another important milestone in the regulatory process when initial comments to the SEC’s proposed rules were filed. Unfortunately there was a delay in posting these due to a backlog from other SEC proceedings. Only a couple of hours ago most of the comments were made publicly available. We are beginning a full review at this time, but at the highest level. We’re not seeing anything beyond what we expected and we really appreciate a number of supported filings made by multiple parties representing various interests. Reply comments are due on June 4, and we look forward to providing our detailed formal responses at that time. Obviously, given that the filings were posted so close to the time of this call, we aren’t able to comment on the details of any individual submission during the Q&A session today. But we are generally very pleased with what we are seeing and expected a few other submissions could trickle onto the SEC website over the next day or so.
With this we conclude the prepared remarks. Operator, would you please give instructions for Q&A.
Yes. Thank you, we will now begin the question-and-answer session. (Operator Instructions) it looks like we have Mr. Steve Sweeney on line from Elevation, please go ahead Sir.
Steve Sweeney - Elevation
I know you can’t talk about the specifics of each of the filings. There were filed so recently, but in general how do you feel, or how confident are you feel that you can respond to these the opposition ones in particular in a timely manner? How does that affect, sort of your timing on when you will get final approval? It’s still sort of a Q3 - Q4 band or is it -- if there has been really no new opposition or surprises, does that sort of push it forward a little bit, maybe into Q3?
Steve, I’m not sure that I would feel comfortable handicapping the SEC process, around a month or quarter, so much of that. I do think that the comments that we have, right up to now don’t present a series of new issues and these are different than those anticipated a while ago. But we feel fairly comfortable with what we are seeing, but we really need to think down very deeply over the next couple of days and make sure we understand the new onsets and need to play between all of the contents.
Steve Sweeney - Elevation
And on the other side of the coin, there are a number of filings that were in support of the NPRM, some of the names were sort of new and weren’t really in the picture before. Were you surprised by any of the filings that were in support of the NPRM.
Well, pleasantly, yes. I mean it’s interesting when you see people that line up on your side because often in a proceeding like this if someone has something positive to say, they just elect (ph) not too much at all. But we spent a lot of time in the last while trying to outreach the company that would have had an opportunity to either be [indiscernible]. So I guess some of the people that time would understand what’s in it for them and their part there was a benefit for the company.
Steve Sweeney - Elevation
Just the last question I have is, there was one other Wi-Fi lines that was one of the -- later voiced some opposition but the filing looked, it looked like the same presentation that they filed from January this year, and I know that they were one of the sort of the big, they were one of the entities that everyone expected to really oppose it and it didn’t seem like there was new material they have basically in that presentation, so I just wanted to -- I was just wondering if you could comment on that, if you agreed with it or just had any thoughts on that one in particular.
You know Steve, I haven’t had an opportunity to study that one, I’ll read through it and it’s the same general conclusion that we did that the information that was contained was close to the same information we have been talking to them about and then filing about, but I really need to step carefully, I’m sorry it’ll take me a couple…
Steve Sweeney - Elevation
Okay, yes, I totally understand, thanks for taking the questions.
You bet, thank you.
And thank you, our next question comes from Jason Bernstein from Odion Capital, please go ahead sir.
Jason Bernstein - Odion Capital
Hi guys, nice quarter, just a quick question with regard to Sat-Fi, is there any update as to the approval process there and sort of a, one can read sort of your price point on that and when it’ll be introduced to market.
Jason we definitely expect Sat-Fi to be in the market during this quarter, the second quarter, we have not finalized the pricing yet that we intend to go out to the market with, as you can imagine there’s an iteration between a broad range of pricing plans and therefore the opportunities for various parties to pay less or more, on the equipment side, so we’re working through those things right now and we do not see anything on the certification side which would mean that the product was not in market before the quarter is out, now that said it’ll be later so I wouldn’t anticipate a substantial financial impact in the quarter but the product itself will be there and will be used and for all of us that have been using it, in last several months on a test basis I can tell you it is extraordinary.
Jason Bernstein - Odion Capital
Great, and if I can, I have a follow up regarding some of the filings, I know you can’t go into details but it seems like in the case of the Wi-Fi alliance you know I browsed some of their sponsors on their site and you see a few like Cisco, looks like Cisco’s comments are supportive but then you have the Wi-Fi alliance that is opposed and at the same time Comcast seems to be a sponsor there as well and we thought the National Cable guys being you know relatively supportive as well, I’m just curious to know if the Wi-Fi alliance is one of the groups you reached out to because their members it seems their members through other channels are being supportive yet the Wi-Fi alliance seems to be a post, just if you can discuss any sort of where that opposition is coming from given some of their members seem to be supportive.
Jason, that one is always a bit of a mystery, that’s a giant organization with 600 members so everybody that has a Wi-Fi device or a Wi-Fi aspiration can and is a member of that organization, so I can’t speak to how they fashioned their advocacy, but so need some time to understand that. We have had substantial conversations with many of their members and we know that many of their members are very supportive of TLPS and in fact we have done a request for information in order to purchase access points to meet some of the obligations under the TLPS authority that we’re seeking, and every single party that was talking to us about selling us access points is a member of the Wi-Fi alliance. So I can’t speak for how they do what they do exactly but it doesn’t surprise me a lot that independently a firm like Cisco is taking positions which are quite different from the giant organization itself. I’m sure that no one at the top of Cisco thinks that the Wi-Fi alliance is supposed to tell them how they’re supposed to run their business, so if they have a different opinion they put it in the record and in this case it seems that they have.
Jason Bernstein - Odion Capital
(Operator Instructions) And we have John Petrozzi on line from Muller Road Capital, please go ahead sir.
John Petrozzi - Muller Road Capital
Hi guy, I’m just wondering now that it looks like there’s some light at the end of the terrestrial tunnel have you thought about or engaged anyone as far as partnerships on the technology side, any bigger players out there that you’re kind of running through scenarios with at this time.
Yes I think we have been pretty forthright in our conversations in the past with the street, about those discussions, and we’re having them with a broad groups of participants, some of the conversations are with cable companies, some of them are with carriers, and some of them are with technology companies. Each of them have different applications for TLPS, and some of them are very interesting and avant garde, so those conversations are continuing but we are extremely focused on the regulatory process right now, I mean once you get behind us, so that we can ramp those discussions up.
And at this time I am showing no further questions, I will now turn the call over to Kathryn Singer for final remarks.
Thank you for your participation today and have a great evening.
Thank you ladies and gentlemen, this concludes today’s conference. Thank you for your participation and you may now disconnect.
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