Globalstar, Inc. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Globalstar, Inc., a provider of mobile voice and data communications via satellite, for the three and six months ended June 30, 2008. The company operates in over 120 countries, serving commercial, recreational, and government sectors. The reporting period covers the second quarter of 2008, a time when the company is managing an aging first-generation satellite constellation while investing heavily in a second-generation system.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $22,999 | $45,133 |
| Operating Loss | $(12,078) | $(23,630) |
| Net Loss | $(7,348) | $(13,983) |
| Loss Per Share (Basic & Diluted) | $(0.09) | $(0.17) |
| Cash and Cash Equivalents | $25,596 | $25,596 (as of June 30) |
| Restricted Cash | $135,614 | $135,614 (as of June 30) |
| Total Debt | $250,000 | $250,000 (as of June 30) |
| Net Cash Used in Operating Activities | N/A | $(14,453) |
Note: Total debt consists of $100 million in long-term debt and $150 million in convertible senior notes. Restricted cash includes funds held in escrow for satellite construction and interest payments.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 11% for the quarter and 8% for the six-month period compared to 2007. Service revenue dropped 17% (quarterly) due to lower Average Revenue Per Unit (ARPU) necessitated by two-way communication issues with the aging satellite constellation.
- Subscriber Growth vs. Revenue: Despite a 14% increase in total subscribers (driven by Simplex/SPOT users), service revenue declined. Retail ARPU fell 19% to $38.57, while Simplex ARPU rose 18% to $4.78.
- Expense Volatility: Operating expenses decreased 16% for the quarter primarily because the prior year included a $17.3 million non-recurring impairment charge on subscriber equipment. However, depreciation and amortization increased 157% due to placing eight spare satellites into service.
- Net Loss Improvement (Quarterly): Net loss improved by 42% to $7.3 million for the quarter, largely due to the absence of the prior year's impairment charge, partially offset by higher marketing and depreciation costs.
Guidance, Outlook, and Risks
- Capital Expenditures: The company estimates total capital expenditures of approximately $1.26 billion through 2013 to procure and deploy the second-generation satellite constellation and upgrade ground facilities. Significant contracts exist with Thales Alenia Space (satellites), Arianespace (launch), and Hughes (ground network).
- Liquidity Strategy: Globalstar raised $150 million in Convertible Senior Notes in April 2008 and drew $100 million on a delayed draw term loan. Management expects to fund operations and capex through these proceeds, cash on hand, and future cash flows from Simplex products (SPOT).
- Key Risks:
- Satellite Degradation: Ongoing degradation of S-band antennas on the first-generation constellation is reducing two-way voice service availability. Management expects most satellites launched between 1998-2000 to cease supporting two-way communications by the end of 2008.
- Currency Risk: A significant portion of capital obligations (satellite construction) is denominated in Euros. A weaker U.S. dollar increases costs.
- Competition: Increased competition from terrestrial cellular expansion and other satellite providers pressures pricing and margins.
- Legal Proceedings: The company is defending a securities class action lawsuit regarding its 2006 IPO and a consumer class action regarding service coverage. Management believes these will not have a material adverse effect.
Investor Verification Checklist
- Second-Generation Constellation Timeline: Verify the progress and funding status of the $1.26 billion capital program, specifically the delivery schedule for the 48 new satellites (expected 2009-2013).
- Two-Way Service Degradation: Monitor the rate of satellite failure and the impact on subscriber churn and ARPU as the first-generation constellation ages.
- Liquidity Runway: Assess the sufficiency of current cash ($25.6M) and restricted cash ($135.6M) against upcoming contractual obligations, particularly the $231M due to Thales Alenia Space by June 2009.
- SPOT Product Adoption: Evaluate the growth trajectory of the Simplex/SPOT segment, which is the primary driver of subscriber growth and a key component of the future revenue strategy.
- Convertible Note Terms: Review the conversion rates and "make whole" provisions of the $150 million Convertible Senior Notes issued in April 2008.