A Bird That Is Still Having Trouble Taking Off
By Aram Fuchs
Since the last time we visited GLOBALSTAR TELECOMMUNICATIONS (GSTRF) (The Sell Report, The Telecomm Analyst, June 13, 2000), the stock has dropped 67% to close on Nov. 7 at $2.59. The company recently reported results for their September quarter and the results reinforce our negative view on the shares — despite their jaw-dropping decline.
GLOBALSTAR, which spent billions of dollars to build its network of 48 low-earth-orbiting satellites, was only able to attract 21,300 subscribers as of Sept. 30. The company garnered only $1 million in gross revenue for the quarter, and to make matters worse, these subscribers are only using the phone 40 to 50 minutes a month. According to Merrill Lynch, GLOBALSTAR initially expected subscribers to use the phones for 100 to 120 minutes a month. That rate was cut to 80 to 90 minutes after the service was inaugurated, and GLOBALSTAR management has continued to guide analysts to lower usage rates.
With candor that is sorely lacking in most earnings releases these days Bernard L. Schwartz, the Chairman and CEO, of GLOBALSTAR was blunt. He said, "the rate of growth at GLOBALSTAR, in terms of both subscribers and usage, while steady, is unacceptably slow." Mr. Schwartz then went on about his strategy to shift GLOBALSTAR's marketing focus. "Early marketing efforts by the [GLOBALSTAR] service providers focused on broad distribution channels into the consumer markets. While continuing that method, we are accelerating plans for direct marketing to large industrial and government accounts." The new strategy, which focuses on lowering the price of the phone and increasing sales to corporations instead of consumers, makes sense.
Unfortunately it's too little, too late. If you add operating losses and interest expenses the company lost $89 million in the third quarter. At this rate management expects that their cash will only last until May of 2001. While the new marketing strategy seems wise, it's also something the company thought of this earlier. It seems clear that even the new strategy won't deliver enough subscribers over the next six months to avoid an incredibly dilutive equity financing.
Essentially, the company is going to have to sell shares to a new investor that will dilute the current shareholders' stake to a small minority holding. If GLOBALSTAR chooses not to go ahead with an equity financing, the company will have to throw itself at its creditors, and ask them to exchange debt for equity in order to cut interest costs. But again, current stockholders would see their ownership diluted into owning a small minority stake.
Of course, if GLOBALSTAR can't consummate some sort of agreement that will give them more cash while easing its interest expenses, the bondholders will force a liquidation. Under that scenario, current equity holders will almost certainly be left with nothing but a thanks and goodbye.
Mr. Schwartz has certainly put himself in a tough situation, but he is no naive dot-com chief executive. It will be fascinating to see how he extricates himself — he is both a stockholder and a bondholder in GLOBALSTAR — from this situation.
Fertilemind.net continues to think that there is a market for a satellite-based wireless phone system. There are many obvious niche markets for the service. And, if you subtract out the current interest costs, the network has relatively low fixed operating costs. Iridium's failure earlier this year and GLOBALSTAR's current straits prove only that these companies misjudged the patience and capital required to build such a system.
Aram Fuchs is the CEO of Fertilemind.net, an independent Internet equity research and consulting firm. At the time of publication, he did not have any interest in the securities mentioned in this article. Mr. Fuchs frequently buys and sells securities that are the subject of his articles, both before and after publication. |
