By Marc Crossman and Anh Steininger

Loral has been attracting the attention of the financial community recently. Loral has reported fourth quarter and full year 1999 revenue and EBITDA results essentially in line with Street expectations. More importantly to the investment community, Loral has finally outlined its long-awaited broadband strategy for Cyberstar, although it has yet to name any strategic partners.

The strategy centers around a $3.5 billion hybrid satellite/fiber ground network system using Ku-band and Ka-band satellites. Revenues at Cyberstar doubled from last year to $85 million, and some aspects of the broadband strategy have been outlined. The completed hybrid satellite/fiber ground network will use both Ku-band and Ka-band satellites capable of servicing 10 million homes and small offices. The network will first take advantage of the satellites already in place, Telstar 4 and 6. In 2002 and 2003, the two Ka- band satellites will be launched to be collocated with the two Telstars. The overall cost of the (North American) system is estimated at $3.5 billion.

Similar to Globalstar, Loral Cyberstar will market as a wholesaler. As a matter of fact, the development of Cyberstar (broadband) will follow the model set up by Globalstar, in terms of leveraging the expertise and the strength of desirable partners. The two markets that Cyberstar will target are the consumer market and the streaming media market (or the business market). Although this takes Loral further along in the broadband game that it was six months ago, it is still catching up to its competitors, such as Astrolink and Spaceway. Cyberstar still needs strategic partners, especially if Loral’s plan is to develop it in the same fashion as Globalstar. The disclosure of this much of the broadband strategy is a step in the right direction, but strategic relationships will be key to bringing this strategy to fruition. Until Cyberstar names one or two key strategic partners that can bring either content or subscribers to the project, we would hesitate to add a premium to its valuation.

Loral’s Cyberstar broadband project represents long-term upside; however, for the next six months to a year, it is the subscriber results of Globalstar that will determine Loral’s stock price. For the moment, Globalstar remains a highly risky venture until it starts producing strong subscriber numbers, which we do not expect until the middle of the year. As we went to press, the Street was looking for Globalstar to have between 20,000 and 30,000 subscribers by the end of the first quarter. It is unlikely that Globalstar will meet the Street’s expectations. As a result, do not expect Globalstar to add significantly to Loral’s near-term stock performance.

At press time, Globalstar had billable service in 18 countries, and approximately 50,000 handsets in the distribution pipeline. At the end of the first quarter, 80,000 handsets should have been produced, as opposed to the previous estimate of 150,000 to 175,000. Ericsson has finally begun to manufacture the handsets and by late July, as opposed to the original estimate of January, the production rate should be at around 40,000 units per month.

At this point, there should be about 22 fully operational gateways spanning 80 countries. At the production run-rate of 40,000 units per month, there should be about 425,000 handsets at year-end, short of the original estimate of 600,000. For Globalstar to reach the 600,000 units, the three manufacturers, Qualcomm, Ericsson and Telital would have to add a second production line. We will not know this decision until the middle of the year. Management remains convinced that it will reach its revenue expectations of $200-$300 million for the year 2000, however, the majority will definitely be late in the year.

Due to certain delays associated with the service launch of Globalstar, we have revised our estimates downward from 665,000 subscribers putting 466 million minutes on the system, generating $220 million in revenues. The new numbers are a total of 525,000 subscribers putting 288 million minutes on the system, generating $137 million in revenues. This is in the middle of the range of management’s subscriber estimates of approximately 500,000-600,000 subscribers, and below management’s revenue estimate of generating between $200-$300 million in revenues. This takes into account the delays experienced by Ericsson and the fact that Globalstar will only be truly global and fully deployed by year-end. As a result, Globalstar will not be reporting meaningful results until the end of the second quarter, at the earliest. v

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.