DOLLARS AND SENSE: The Clock Is Ticking For Globalstar
by Marc Crossman and Aileen Chen
After another quarter showing insufficient growth in subscribers and in revenues, Globalstar is failing once again to prove to investors that its strategy and its products and services are winning customers. Further disappointing investors was Loral stating that it will not fund Globalstar further if the satellite mobile phone company cannot operate well on its own. Investors, unhappy with Globalstar’s performance, pushed the stock price down by roughly 60 percent to $2.38, its lowest point in years, on the day of the earnings announcement. With enough cash to last only until May of next year, (according to the company), Globalstar is struggling against time. Unless the company begins acquiring customers exponentially faster than it has been since commencement of service earlier this year, which is highly unlikely given the take rate so far year-to-date, Globalstar will need additional funding or restructuring of its debt by May. But time, money and investors’ patience are quickly running out.
Globalstar’s third quarter results were lackluster, again disappointing investors by showing unimpressive revenue and subscriber growth quarter-over-quarter. Net revenues grew 68 percent to $1.2 million during the third quarter, from a measly $708,000 during the second quarter. Revenues missed the Street’s third quarter estimates, which were already drastically lowered after the company’s second quarter earnings severely disappointed investors. Net loss for the third quarter totaled $211 million, slightly deeper than the net loss of $209 million during the prior quarter.
Underlying slow revenue growth was the slow take rate of new customers. The number of subscribers increased 78 percent from roughly 12,000 at the end of the second quarter to 21,300 at the end of the third quarter. This implies subscriber additions of 9,300 customers during the third quarter, only 3 percent more than the second quarter’s 9,000 customer additions. Clearly, Globalstar is not signing up customers as quickly as it needs to be. In turn, billable minutes of use during the third quarter grew 109 percent to 2.3 million minutes versus the second quarter’s 1.1 million minutes. Although the growth in percentage terms seems robust, the pace is hardly what the company and the Street were expecting. It is particularly alarming that the average weekly usage minutes are not growing more quickly. For the month of July, the total minutes of use per week averaged 135,000; this number grew 27 percent to 172,000 in August. However, during September, average weekly total usage grew only 11 percent from August to 191,000.
Two issues seem to stymie Globalstar’s subscriber growth. First, Globalstar’s marketing efforts aimed at the consumer market have not been effective. Hoping to gain more customers and generate more revenues, Globalstar is beginning to target commercial customers and government agencies. The company is also offering new package deals with cheaper phones and even free phones or free minutes, subsidizing the cost along with manufacturers and service providers, something it has not done before. The second issue, and the more frightening one for the company, is there may not be a substantial and profitable market for Globalstar’s products and services.
The pace in which Globalstar is growing its customer base and minutes of use will barely help bring Globalstar to a break-even point next year. With approximately $90 million in operating expenses during the third quarter, the company’s revenues of $1.2 million only covers slightly more than 1 percent of the cost. This is only a slight improvement from the second quarter when revenues only covered 0.7 percent of the cost. The take-rate has to increase at a mind-blowing speed in order to cover Globalstar’s significant average operating cost of roughly $90 million per quarter. Even if revenues grow ten-fold from this quarter’s revenues to $12 million per quarter by the end of the first half of 2001 (which is highly unlikely given the take rate so far), revenues would still only make up slightly north of 10 percent of operating cost.
There’s no doubt, with a painstakingly slow customer take rate, Globalstar will continue to face liquidity issues. Globalstar is burning cash quickly but not generating enough- -and not showing the potential–to cover the cost. At the pace at which it is generating revenues, Globalstar will need additional funding to operate past May 2001, given its treasure chest of $286 million in cash at the end of the third quarter, or will require some form of restructuring of its outstanding debt of $2.9 billion. In addition, Loral announced that it would not funnel more funds to Globalstar if the satellite mobile company cannot significantly improve its performance. Although this announcement is positive for Loral’s stock (which has been highly undervalued with Globalstar as an overhang), it is damaging for Globalstar as it could be without operating cash by May of next year if it does not significantly grow its subscriber base and consequently lose access to additional funding from its investors such as Loral.
Globalstar’s investors have clearly been disappointed by the company’s dismal earnings and outlook. Indeed the company has built a portfolio of valuable assets with its fleet of 48 operating satellites and numerous gateways. However, without enough customers utilizing the birds in the sky for the services that Globalstar is offering, the fleet and the network cannot realize their value. The main concerns have been, and remain, whether or not there is a market out there for Globalstar’s mobile satellite phone products and services and if Globalstar can successfully attract customers to subscribe to its services. Unfortunately, Globalstar is quickly running out of the time it needs to prove its belief that the market exists and it can capture it.
Marc Crossman and Aileen Chen are satellite analysts at J.P. Morgan in New York City.