At least Mr. Baker took the time to address some of the criticims levelled at his first article. Maybe there's hope for him yet, although he's got to get his facts straight.
Since his article contains so many misperceptions that we're hearing here and over on the Gorillas and Kings thread, it may be worthwhile to address it in detail:
>>The response to my recent column on Globalstar (GSTRF: Nasdaq) has been nothing short of remarkable. I must say that the company has some vociferous shareholders and if nothing else they represent a very loyal base of support for this controversial stock. <<
A lot of our understanding on this thread has been provided by someone who isn't even long the stock.
>>Potential Demand
I am the first to admit that there are unquestionably many spots in the world that are currently unable to secure wireless that could potentially utilize satellite service. However, I still contend that there are not enough of these users to support the Globalstar business model. All it takes is a little common sense here: How many potential users are on oil rigs or in the Australian outback? <<
I'd say that "common sense" is not sufficient to make a decision on a stock. Last year I did a(n imperfect) review of the US Statistical Abstract to see get an order of magnitude estimate of the market in the US. Here's the link:
Message 11912075
The review did not hit all of the potential market areas, and in fact I did not find much market for the vertical industries, which G* management has indicated is their first order of focus. Obviously, they have done more market investigation than I and identified this as an attractive area.
The company has a large number of first rate telecomm companies offering service in countries around the world. Each of these service providers have independently decided that the Globalstar system provides value within their service areas. And they have backed up their decisions with commitments to spend money to build gateways. Some of those gateways are already on line. Others are under construction.
>>The company is burning $125 million per quarter in interest and operating costs. This does not include capital expenditures.<<
Capital expenditures by Globalstar are virtually finished until the second generation system starts to go up.
>>If I assume that the average cost of a call is $2.25 which is based on 50% at local level of $1.50 and 50% at International rate of $3.00, Globalstar would need to generate 55.5 million minutes of calls per quarter or 617,283 minutes per day to just cover the cash burn rate.
If the average customer uses 150 minutes per month (a very aggressive amount) the company would need to have 123,456 customers on day one, just to be at break even.<<
The number of minutes "on day one" is irrelevant. The nature of development stage companies is that they have negative cash flow until they break even. With today's announced financing, G* probably has enough cash to get through 2000, depending on the ramp up of minutes of use. Management has shown the ability to keep financing a year ahead of needs.
The present projections use a rate of 47 cents per minute as the the wholesale rate. Globalstar wholesales minutes to the respective service providers, which charge the customer the rates Mr. Baker quotes. Numbers to key on are (1) user terminals (fixed and mobile) delivery each month, (2) minutes of use per terminal, (3) the number of terminals needed to reach ebitda, which is presently estimated to be 300,000, and (4) to reach breakeven, which is estimated to be 1,000,000.
The distinction between mobile and fixed terminal deliveries is important, since fixed terminals will likely provide substantially more minutes per month than mobile.
>>At the time Globalstar was formed I agreed that it was a great idea. However, the executives could never have envisioned the pace of technology development when they formulated the original plan for the company.
The company's Achilles heel is the fact that it has spent vast sums of money (more than $4 billion) developing an infrastructure that I believe may be usurped by many emerging technologies. These new technologies will ultimately threaten the company's fundamental business model by delivering cheaper service to its target user base.<<
This criticism is a little vague. What technologies? The first generation of the Globalstar system is focused solely on one thing: Areas unserved or underserved by the existing terrestrial (landline or cellular) system. This system has not expanded to the point it provides anywhere near ubiquitous coverage.
>>Lastly, satellites do not have an infinite life and must be replaced over time, which represents an ongoing and huge capital investment. That places Globalstar at a distinct competitive disadvantage compared to the terrestrial players.<<
What disadvantage? The terrestrial network has to be renewed on a quicker than ten year cycle. Particularly, cellular base stations are exposed to severe weather breakdowns. The full cost of installing and maintaining cellular basestations is far above that for caring for satellites.
>>Competition
I was taken to task for mentioning a number of companies that many readers could not possibly envision as potential competition for Globalstar, because those firms are terrestrial-based providers.
This is exactly my point. The terrestrial providers are the emerging competitors and this is the central thrust of my argument. For Globalstar to be successful in my mind it will need to grab share away from the terrestrial providers, which I believe is a long shot given the pricing of its service.<<
David's got it backward. G* is absolutely an adjunct to the terrestrial network. It represents an opportunity by local cellular providers to expand the market beyond their cellular base. It represents an opportunity to offer ubiquity of coverage within their geographic areas without having to build out their cellular systems to all corners of those areas.
>>Like many of my readers, I believe the company will have to evolve into a wholesale model for its service, however the company contends this is currently not a part of their strategy. <<
Absolutely backwards--G* is a wholesaler. It was formed as a wholesaler. it has never been envisioned to operate in any other way.
>>If it does in fact move in this direction, companies like Global Crossing (GBLX: Nasdaq), Level 3 (LVLT: Nasdaq) and Qwest (Q: NYSE) will fight for users and offer much better prices. These terrestrial wholesalers will have wireless nodes connected to its fiber nets filling many of the current "gaps" in wireless service.<<
Huh? GBLX and Q could only hope to have the list of "retail" service providers that G* has lined up. And how are GBLX and Q going to build out nodes to fill gaps? The gaps are caused by cellular base stations not being present. Q and GBLX don't do that.
>>Risk and Return
The bottom line is that when you make any investment you must gauge the incremental potential return for each incremental level of risk. At Globalstar's current valuation the risk of holding these shares vastly outweigh the potential upside of owning them.
The company's huge market capitalization leaves it very little room for error and this is a major factor considering the riskiness of the business. Unlike most telecom plays, a lot can go wrong that is totally beyond the control of management and is totally unrelated to the fundamental business model.<<
The company's implicit market cap is something like $11 billion. The company's potential revenue in the first generation is something like $3 billion. After the fixed and operating costs (less than $1 Bn per year) are covered, all other revenues drop to the bottom line. That's a forward PE of 5. Not bad--for the first generation.
And especially not bad if it is understood that the first generation system will be a stepping stone for a data-plus-voice system in the second generation, which will offer some multiple of greater revenues than the first generation.
>>What I am talking about are malfunctions in the operation of the satellite, launch or other problems, which are not that uncommon.<<
All of the necessary satellites have been launched. The system works as advertised, even better than advertised. The issue of whether the system works has been answered in the affirmative.
>>In my mind there are many other opportunities in this market that offer considerably less risk and at least as much upside inherent in Globalstar's shares.<<
The risk is lower than Mr. Baker has been stating, and the upside is higher.
Note to Jon Koplik: Still think it's redundant to argue that cellular coverage is not complete? :o) |
