JRH: Justin. Suggested earlier that Loral (LOR) be put on the W&W. In partial defense of that, please see the following post. Those uninterested in a potential king in satellite com should skip. It is long, technical and detailed. But from the best analyst on the subject IMO.
Talk : Communications : Globalstar Telecommunications Limited GSTRF
To: Rocket Scientist (4939 )
From: RMiethe Saturday, May 29 1999 4:53AM ET
Reply # of 5168
RS-- not sure what post you had in mind about the "coincidence" of Reynen Readware's writing style appearing. It is no secret that I borrow from many sources-- I have said as much, and it could well have been from him or his firm that the post came. That might be the memo on pricing and the market. As for the comment on Australia cellular, as I remember it, though, the citations on that were from a 1998 ITU yearbook that was quoted. Speaking of Australia, the new man from Iridium is from Australia, the President of Loral is from Australia, and you have Reyn Readware who did some graduate studies there. I wonder if it is the koala bears that makes them so interested in satellites.
It is also no secret that I am in no way a technology specialist, so I do check frequently with satellite sources for what I read here from others on the board and also what I post from them.
I leave one week for vacation, and I see hellsappoppin.
Speaking of Australia, here is a piece this afternoon from someone who once lived there:
Loral and Hughes: Persistence of a Theme
When and after in 1996 we were contracted to draw up financial and project reports for the then newly formed Loral Space and Communications, our projections on the company's share price performance were always conditioned by the phrase "depending on timely executions of the company's launch plan". As of today, the company is 2 GEOs and 8 months behind in the execution of its published November 1997 launch plans. And that is within industry tolerance. As of today also, a company that in April 1996 had $700 million in cash, no assets except part ownership of a satellite manufacturing company (SSL), and rented office space from Lockheed Martin in a building on Third Avenue in New York City, owns 4 GEOs in full, and 3 in part, with transponder privileges off two others. It is 50% complete on a LEO mobile telephony system. Additionally, it owns 7% of a DARS and 20% of a proposed LEO broadband system.
As of the close of business on 28 May 1999, the share price of Loral has appreciated 18.&% since April 1996. In the same period its EBITDA has grown some 300% (as of 1st qtr end '99 [annualized]), with a 23% increase in shares outstanding. Going forward, two more GEOs are set for launch by the 3rd qtr 1999, with at least two more (and probably 3) in FY 2000. Its LEO telephony system is scheduled for completion in six months. In FY 2000 its year-end EBITDA from its own wholly owned divisions should be 6 times its 1996 year-end.
Something is obviously amiss with the price today of the company's common, then. Unusually amiss.
While the company has spent some $387 million in development costs for Loral totally owned divisions, over the same period it has generated about 12% more in EBITDA. Assuming this year no development costs whatsoever (just for example), and $310 million in EBITDA (over 30% lower than the company's own forecast), putting this number in a net earnings/basic share model, the company would have earned this year $.71/share. We look at Hughes Electronics 79 p/e on trailing earnings, apply that to Loral's trailing earnings on a per share basis (without development costs) [{$180 million over the last 4 qtrs} divided by 289 million shares], and we obviously do not get $16 5/8 for our price.
Either the Hughes multiple is wrong, or the Loral one is-- even taking into account when factoring in development costs, the trailing multiple used is wrong.
The price of Loral today is lower than it was after its 1st qtr '99 earnings report announcing a 100% increase in EBITDA year-over-year.
An observer, asked to comment on situations that appear amiss, presumes in a non-Humean way that for every event an explanation is found. Some have suggested the recent Cox report as explanatory for Loral's 28 May price. For those practiced in jural science by which questions of fact are ascertained and demonstrated in contested questions of right between man and man in courts of justice, for those accustomed to evaluate evidence with all the assurance possible for truth finding, the Cox Report demonstrates nothing against Loral or Hughes. Classified testimony, not made public in that report (some 400 pages) from various scientists and engineers testifying before the Cox Committee contesting the political claim of missile technology transfer, were not made available to the citizenry. When it is, the media will not report what they know now to be inconclusive against Loral and Hughes, sc., the Cox political remarks. Only the salacious will do for the media's audience. In the interim reputations and shareholder assets are diminished with no possible recourse for suit. So the American way.
Others have suggested Globalstar as the reason for Loral's price. And discussion of this, especially if informational and factual, is probably of more interest to the institutional money manager. Iridium has made no inroads into the telephony market, and for whatever reason that is, Globalstar is seen as possibly encountering the same fate. So why own Loral?
Others see Inmarsat, in addition to Iridium, as a paradigm to be followed in forecasting what will happen to Globalstar. In ten years Inmarsat has only 51,000 customers.
Inmarsat, though, differs importantly from Globalstar. It has voice delay in a cumbersome phone that weighs 6 pounds, requires an inclinometer, and exact line of sight to its GEO. Additionally, frequently one cannot access the system-- I know from personal experience. Globalstar offers a much smaller handset, no voice delay, and has far fewer line of sight drawbacks (path diversity) than Inmarsat's technology. The price is far lower also for both the handset and cost per minute. Some Inmarsat calls have been as costly as $8/minute.
Pricing is an important, probably the most important, variable in the Globalstar equation for its future. Price is a function of supply-demand. Set the cost per minute too high, and the system will not sell. What price is too high? $1/50/minute? $1.00/minute? Globalstar's price will vary from market to market is our expectation. Where the demand is high the currently quoted expectation in the Globalstar literature of $1.50/minute is not implausible. This is more likely in the vertical market, where usage minutes per month is 500 on the average per user.
Where demand rises only if the price is cut measurably, we expect price flexibility. And quickly. We have never expected a monolithic pricing structure for Globalstar, and from the first the company has stated its wholesale cost will be from $.35-$.59/minute. At a wholesale cost of $.35/minute the reseller can offer the service profitably (a 32% pre-tax margin) at $.68/minute. The reseller will if that is necessary, we believe. If the service can be sold at that price it is in the reseller's, the Service Provider's, economic interest, to do so.
We also will add here that the Globalstar chairman believes pricing will be strong, if still that is to be seen.
While we have seen very penetrating price critiques of the Globalstar sales structure, we are certain that Service Providers will "go with the market". Air Touch Cellular's recent $49.99/month pricing plan in America is an example of Air Touch's own recognition and action upon new supply-demand clearing points. We expect Air Touch, our of its own economic self-interest, to treat Globalstar no differently. It will price Globalstar to sell. In Brazil, however, where cellular is $1.40-50/minute, we would expect a different pricing point for Globalstar.
If one uses a 7 billion minutes per year of usage capacity for Globalstar, wholesale minutes sold at $.25/minute yield it $1.75 billion in revenues. We do not believe Globalstar will find that inimical to its expectations even though the price of $.25/minute is substantially lower than the average of $.47. We see a $.25/minute Globalstar wholesale pricing translating into a $.57/minute retail call off the satellite (wholesale plus mark-ups). The system has that flexibility.
Nor does Inmarsat posses a marketing force. Globalstar's partners comprise 7 major Service Providers with a monthly billing base today of over 65 million customers. Can we expect that 1% of that base will use the Globalstar sat phone system? Cellular companies we have contacted, 11 to be exact, believe that is what will happen: satcom mobile phones should get at least 1 and up to 2.4% of the wireless market. As the number moves up in FY 2002 to some 90 million customers, Globalstar, in the lowest number, will have 900,000 users. 2% of the customer base will be 1.8 million users.
Since our first study in October 1996 we have always assumed Globalstar would reach 1.86 million users net of churn by FY 2002. We still believe that to be true, the only caveat being how aggressive the Service Provider partners will market Globalstar's satellite phone system. That will determine the speed of the ramp-up. And speed is important-- very important. That means targeting the right group at the right location and for the right price. We have spoken with three SPs, and see that this is what they have been researching for some time relative to their Globalstar user market.
SPs as investors in both the common of Globalstar and owners of the gateways for which they have paid have an incentive for a return on their investment. We believe their past business acumen will enable Globalstar to succeed in its satcom telephony effort, unlike Iridium which had no marketing force (regional telcos) similar to Globalstar's, a totally different pricing structure, and a technology that is out of proportion to what is necessary for a LEO system. Also Iridium's ISL technology was meant to totally circumvent the ground PTTs. The reason still baffles us.
Comments about Iridium's misplaced orbiting, holes in the planes, and other technology horror stories have no basis in fact to them. We don't know why they are spread, but we do know that NORAD is a more reliable source for information on these matters than those in the media and on Wall Street. Problems there have been-- but not of the portending some have claimed.
If China Telecom, to continue on Globlastar, with Globalstar do Brazil, can generate 200,000 users for each country by FY 2001, we have optimism that Globalstar can reach 1.86 million users by FY 2002. The market is there, as confirmed to us by cellular phone companies that are not in partnership with Globalstar. It is a question of reaching the user, out of his roaming area for a sufficient portion of his telephony usage, who can transfer to a system that extends his coverage in an affordable way. This is the 1-2% customer base that will use the satellite time, and more of it the lower the price per minute.
In its Service Providers Globalstar has placed that emphasis, requiring of them certain sales quotas to maintain their exclusivity with Globalstar as well as requiring of them capital investments. Correct marketing requires phones in inventory at the SP which can be shipped within 48 hours to the prospective user, confident of absolute voice and reach dependability of the Globalstar system-- or at least comparable to cellular in those areas where cellular cannot serve.
Globalstar has a number of hurdles ahead: launches that are successful, financing from the capital markets {vendor financing commitments it has already}, pricing flexibility to bring demand where it profits both Globalstar and the user, and a determination to satisfy its customer that makes for a world class organization. Through Air Touch, Vodafone, and the French telecom company TESAM comes an attention to customer needs that Globalstar has well chosen as its entry point into this world of satellite "no latency" telephony. We think the pieces are there for success, reminding the reader that we see China Telecom as a pivotal variable in how fast Globalstar ramps up to our number for FY 2002 of 1.86 million users. While Globalstar management has projected 3 million users for that year, we think our total will more than satisfy a skittish capital market that has watched Iridium gradually move to the Globalstar model over the past two months. It moved there for the reasons we believe Globalstar will succeed.
We return then to the price of Loral. At $16 5/8 Globalstar has no value in the price calculation of Loral. If we are wrong, and Globalstar does not succeed, we will have been wrong with Air Touch, Vodafone, TESAM, and Elsacom-- companies with years of experience in land and cellular phone systems in over 49 countries. But, again, we believe the market is there, as confirmed to us by the cellular phone industry, and that the SPs, unlike the Iridium network of totally disparate and unrelated service chains, have the marketing cohesion already and technical experience to make Globalstar a postive experience for those to whom telephone communications are a measure of how society should exist in the 21st century.
That is why we believe the price of Loral at $16 5/8 is obviously not a price that even approaches its actual value. But the Cox Report will never have to answer for that. |
