Globalstar, Inc. 10-Q Summary: Period Ended September 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 period ended September 30, 2008. The company operates in over 120 countries, serving government, commercial, and recreational markets. The reporting period covers the three and nine months ended September 30, 2008, compared to the same periods in 2007.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $22,525 | $67,658 |
| Service Revenue | $16,150 | $48,833 |
| Subscriber Equipment Sales | $6,375 | $18,825 |
| Operating Loss | $(17,437) | $(41,067) |
| Net Loss | $(26,103) | $(40,086) |
| Loss Per Share (Basic/Diluted) | $(0.31) | $(0.48) |
| Cash and Cash Equivalents | $12,937 | $12,937 (as of Sep 30) |
| Restricted Cash | $104,722 | $104,722 (as of Sep 30) |
| Total Debt | $285,000 | $285,000 (as of Sep 30) |
| Net Cash Used in Operating Activities | N/A | $(25,974) |
Note: Total debt includes $35 million in revolving credit facility borrowings, $100 million in long-term debt, and $150 million in convertible senior notes.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 12% for the quarter and 9% for the nine-month period compared to 2007. Service revenue dropped 24% (quarter) and 17% (nine months) due to lower Average Revenue Per Unit (ARPU) driven by price reductions to retain subscribers amidst two-way communication issues.
- Equipment Sales Growth: Subscriber equipment sales increased 44% (quarter) and 18% (nine months), primarily driven by the launch of the SPOT satellite messenger product.
- Increased Operating Loss: Operating loss widened significantly to $17.4 million (quarter) and $41.1 million (nine months) from $0.3 million and $16.8 million in the prior year periods. This was caused by higher depreciation (placing eight spare satellites into service), increased marketing for SPOT, and higher bad debt expenses.
- Depreciation Spike: Depreciation and amortization expense increased 120% for the quarter and 133% for the nine months due to the activation of spare satellites.
- Foreign Exchange Impact: The company recorded a $6.6 million foreign exchange loss in the quarter due to the appreciation of the U.S. dollar against the Euro, affecting the escrow account for satellite procurement.
Guidance, Outlook, and Risks
- Satellite Constellation Health: The company faces critical degradation of S-band antenna amplifiers on satellites launched prior to 2007. Management anticipates that by early 2009, these satellites will cease to support two-way communications, though Simplex data services (SPOT) will remain unaffected.
- Second-Generation Constellation: Globalstar is constructing a second-generation constellation (48 satellites) with a total estimated cost of approximately $1.26 billion. Deliveries are expected to begin in Q3 2009. The company has authorized acceleration of the initial 24 satellite deliveries.
- Liquidity Concerns: Management states that current liquidity sources (cash on hand and credit facilities) are insufficient to fund short-term needs without additional financing or access to restricted cash. The company is exploring debt and equity financing options.
- Convertible Notes Conversion: Subsequent to the period end, holders of $36 million (24%) of the 5.75% Convertible Senior Notes submitted notices of conversion. This will result in the issuance of approximately 6.0 million shares and a cash interest cost savings of $35.2 million.
- Regulatory Risks: The FCC recently modified the company's spectrum license, reducing Globalstar's spectrum assignment globally. The company is considering a waiver application.
- Market Risk: The company is at risk of delisting from NASDAQ if the stock price remains below $1.00 for 30 consecutive trading days after January 16, 2009. As of November 4, 2008, the closing bid price was $0.77.
Investor Verification Checklist
- Liquidity Sufficiency: Verify the company's ability to secure additional financing to fund the $1.26 billion second-generation satellite program and working capital needs, given the stated insufficiency of current resources.
- Two-Way Service Viability: Assess the impact of the anticipated loss of two-way communication capability on pre-2007 satellites in early 2009 on subscriber retention and revenue.
- SPOT Product Adoption: Monitor the growth of the SPOT satellite messenger subscriber base and its ability to offset declines in traditional two-way service revenue.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the minimum liquidity requirement of $5.0 million and leverage ratios.
- Convertible Note Conversions: Track the dilution impact from the conversion of $36 million in notes and the potential for further conversions.
- FCC Spectrum Ruling: Monitor the outcome of the FCC spectrum modification and any potential waiver applications.