by Marc Crossman and Anh Steininger

Will 2000 be the year mobile satellite services (MSS) come back into favor? The answer, of course, depends upon Globalstar.

So far, Globalstar is on track with its service launch. There are currently 10 countries on-line with billable service (offering full commercial service) and 61 more countries expected to be on-line with billable service by the end of March, 2000. Regarding its phones, Globalstar currently has over 45,000 units in the distribution pipeline. As for gateways, 10 are in full commercial operation. By Q1/2000, 15 gateways will be in full commercial operation and by Q2/2000, that number will jump to 26. With handset distribution at 40,000 units per month, by the end of Q1/2000 there should be 185,000 to 200,000 Globalstar phones in the distribution pipeline. By the end of Q2/2000, there should be approximately 300,000 handsets in distribution. However, in order for Globalstar to meet their estimate of 650,000 handsets, the manufacturers would have to agree to increase their production rate.

Globalstar has lowered its estimates, from 1 million units generating $600 million in revenues by year-end 2000 down to approximately 650,000 units in distribution by year-end, generating $300 million in revenues. The company has come much closer to our estimate of 665,000 units generating $220 million in revenues. Even at our conservative revenue estimates, we are estimating EBITDA positive by the end of 2000, on a base of only 665,000 subscribers, just one year after starting commercial services. This represents only 9.5 percent of our estimated 2005 subscriber base for Globalstar, and only 0.1 percent of the total wireless subscriber market in 2005. In addition, using our assumed subscriber base of 7 million subscribers by the end of 2005, Globalstar has the potential to generate revenues of $4.5 billion, representing a 6 year CAGR of 83 percent, and EBITDA of $4.2 billion, representing an EBITDA margin of over 93 percent. This is why the MSS sector could be a runaway success if the business plan is executed properly.

The true test, of course, will be the results from the full-scale commercial launch for Globalstar. At that point, Globalstar will shift gears from an event driven stock to a subscriber driven one. Only then can we truly gauge the success of the Globalstar business plan. Our first opportunity to assess the results will be at the end of Q1/2000 when Globalstar announces, for the first time, subscriber results, or rather, minutes used on the system. In order to remain on track, Globalstar must have approximately 145,000 subscribers on the system, or approximately 32 million minutes of use, generating $17 million in revenue by the end of Q1/2000.

Assuming Globalstar hits its numbers, our 2000 price target is $39 per share. However, our model is very conservative relative to the company’s expectations. Our revenue projections for 1999-2002 are a third of the company’s, yet according to our DCF valuation, we still see 44 percent upside from the current price to our 2000 target price using a 35 percent cost of equity. Although it is not an exact science, as Globalstar deploys its network, the risk inherent in the project decreases, and decreasing deployment risk should result in a valuation above our targets, assuming the subscriber numbers come to fruition.

Marc Crossman and Anh Steininger are satellite analysts at J.P. Morgan in New York City. These views are those of the authors and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.