Business Context and Reporting Period
Company: Globalstar, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Globalstar provides mobile voice and data communications services via satellite to commercial, recreational, and government users in over 120 countries. The company is currently in a transition phase, operating an aging first-generation constellation while constructing and financing a second-generation satellite constellation to replace failing hardware.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $17,521 | $48,400 |
| Operating Loss | $(11,677) | $(41,919) |
| Net Loss | $(5,519) | $(41,039) |
| Loss Per Share (Basic & Diluted) | $(0.04) | $(0.30) |
| Cash and Cash Equivalents | $131,699 | $131,699 (Balance Sheet) |
| Total Debt (Current + Long Term) | $463,733 | $463,733 (Balance Sheet) |
| Net Cash Used in Operating Activities | N/A | $(27,468) |
| Net Cash Used in Investing Activities | N/A | $(240,113) |
| Net Cash Provided by Financing Activities | N/A | $387,056 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 22% for the three months and 28% for the nine months ended September 30, 2009, compared to the prior year. This was driven by price reductions to retain subscribers amidst two-way communication issues and lower equipment sales.
- Subscriber Growth vs. ARPU: While the total subscriber base increased 16% year-over-year (driven by Simplex/SPOT services), the Average Revenue Per Unit (ARPU) for retail customers dropped significantly (22% for the quarter, 32% for the nine months) due to pricing cuts.
- Cost Reductions: Operating expenses decreased 27% (quarter) and 17% (nine months) due to headcount reductions, lower marketing spend, and reduced cost of goods sold.
- Derivative Gains: The company recognized a significant derivative gain of $6.0 million for the quarter and $5.2 million for the nine months, primarily due to fair value adjustments on embedded derivatives in its 8.00% Convertible Senior Notes. This gain substantially reduced the reported net loss.
- Liquidity Position: Cash and cash equivalents surged from $12.4 million at year-end 2008 to $131.7 million at September 30, 2009, following the closing of a $586.3 million Facility Agreement and the issuance of $55 million in 8.00% Notes.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: The company estimates total capitalized expenditures for the second-generation constellation and ground upgrades will be approximately $1.29 billion through 2013. Approximately $640.4 million has been incurred through September 30, 2009.
- Launch Delays: The launch of the second-generation satellites has been delayed due to a force majeure event (earthquake damage) at the manufacturer's facility. The first six satellites are now expected to launch in Summer 2010, with the full campaign (24 satellites) completing in Spring 2011.
- Network Degradation: The first-generation satellite constellation continues to suffer from S-band antenna amplifier degradation, limiting two-way voice and data service availability. This necessitates price reductions and hampers revenue growth until the new constellation is operational.
- Debt Covenants: The new Facility Agreement includes strict financial covenants, including minimum adjusted consolidated EBITDA targets (starting at a loss of $25.0 million for 2009 and moving to positive EBITDA by mid-2011) and capital expenditure limits ($391.0 million in 2009).
- Unusual Items: A $2.2 million revenue and $2.0 million gross profit adjustment was recognized in Q3 2009 due to a change in estimate regarding an engineering services contract.
Investor Verification Checklist
- Launch Schedule: Verify the updated timeline for the second-generation satellite launches and the impact of the Thales Alenia Space facility damage on delivery dates.
- Debt Service Capacity: Assess the company's ability to meet the Facility Agreement's EBITDA covenants and interest payment obligations given the current operating losses.
- Subscriber Churn: Monitor the rate of subscriber loss in the two-way voice segment versus growth in the Simplex (SPOT) segment to determine if price cuts are effectively stabilizing the core business.
- Capital Burn Rate: Review the rate of cash consumption for capital expenditures against the remaining availability under the $586.3 million Facility Agreement.
- Regulatory Status: Confirm the status of the FCC Ancillary Terrestrial Component (ATC) license and the partnership with Open Range Communications, which is critical for future revenue diversification.