Globalstar, Inc. 10-Q Summary: Quarter Ended March 31, 2010
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. Globalstar, Inc. is a provider of mobile voice and data communications services via satellite, operating in over 120 countries. The company is currently in a capital-intensive phase, constructing and preparing to launch a second-generation satellite constellation to replace its aging first-generation network, which has experienced performance degradation in two-way communication services.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $15.6 million | $15.2 million |
| Service Revenue | $12.5 million | $11.1 million |
| Equipment Sales | $3.1 million | $4.0 million |
| Operating Loss | $(8.7) million | $(17.6) million |
| Net Loss | $(35.6) million | $(21.8) million |
| Loss Per Share (Basic/Diluted) | $(0.13) | $(0.20) |
| Cash and Cash Equivalents | $96.9 million | $3.0 million |
| Total Debt (Long-term + Current) | $591.5 million | $465.8 million |
| Net Cash Used in Operating Activities | $(20.2) million | $(2.1) million |
| Net Cash Used in Investing Activities | $(76.8) million | $(19.4) million |
| Net Cash Provided by Financing Activities | $126.1 million | $7.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 3% year-over-year, driven by a 12% increase in service revenue. This was primarily due to a 37% growth in the Simplex (SPOT GPS messenger) subscriber base and a 22% increase in Simplex ARPU. These gains were partially offset by a 23% decline in equipment sales, attributed to lower sales of duplex products.
- Operating Efficiency: Operating loss improved significantly (decreased by 51%) to $8.7 million. This improvement resulted from a 27% reduction in cost of services and a 41% reduction in marketing, general, and administrative expenses. Cost reductions were driven by executive departures (resulting in forfeited stock-based compensation), lower headcount, and reduced contract labor.
- Net Loss Expansion: Despite improved operating metrics, the net loss increased by 64% to $35.6 million. This was primarily caused by a $25.0 million non-cash derivative loss. The loss stemmed from fair value adjustments to derivative liabilities (embedded in convertible notes and warrants) due to an increase in the company's stock price from $0.87 to $1.37 during the quarter.
- Liquidity Position: Cash and cash equivalents increased from $3.0 million to $96.9 million, funded largely by $126.1 million in borrowings under the Facility Agreement.
Guidance, Outlook, and Risks
- Capital Expenditures: The company estimates total capitalized expenditures for the second-generation constellation and ground upgrades will be approximately $1.3 billion through 2013. Significant payments are due to Thales Alenia Space (satellites), Arianespace (launch), Hughes (ground network), and Ericsson (core network).
- Launch Schedule: The first of four launches for the second-generation satellites is expected in late September or early October 2010, with the fourth launch targeted for late spring or early summer 2011. Delays were noted due to an earthquake in Italy affecting the satellite fabrication facility.
- Network Challenges: The current first-generation constellation is aging, with degraded S-band amplifiers affecting two-way voice and data availability. The company is relying on the Simplex (one-way) network and new pricing strategies to mitigate revenue impact until the new constellation is deployed.
- Debt Covenants: The company is subject to strict covenants under its Facility Agreement, including minimum liquidity, adjusted consolidated EBITDA targets, and debt service coverage ratios. As of March 31, 2010, the company was in compliance.
- Legal Proceedings: Several litigation matters are ongoing, including patent infringement suits regarding SPOT devices (some settled, some stayed) and appeals regarding FCC spectrum decisions. Management does not believe these will have a material adverse effect.
Key Facts for Investor Verification
- Derivative Liability Impact: Verify the sensitivity of the $25.0 million derivative loss to stock price fluctuations, as this non-cash item significantly distorts net loss figures.
- Second-Generation Constellation Progress: Monitor the status of satellite construction and launch schedules, as delays could impact capital expenditure timing and future revenue generation.
- Debt Service Capacity: Assess the company's ability to meet the Facility Agreement's EBITDA and liquidity covenants, particularly given the current operating losses.
- Simplex vs. Duplex Mix: Track the continued growth of the Simplex (SPOT) subscriber base versus the decline in the traditional duplex subscriber base to understand the sustainability of revenue growth.
- Currency Exposure: Review the impact of foreign exchange rates on revenue (32% denominated in foreign currencies) and capital expenditures (significant Euro-denominated contracts).