3/31/99 ING report on G*/L* (via LOR thread)
ING Barings - Satellite Research Group
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March 31, 1999
Private Meeting with Globalstar & Loral Chairman, Bernard L. Schwartz
We held a private meeting with Bernard L. Schwartz, Chairman & CEO of
Loral Space & Communications and Globalstar Telecommunications Ltd. on
Monday afternoon to discuss an update on Globalstar and Loral Space.
NOTE TO INVESTORS
We continue to be bullish on Globalstar, while we acknowledge that Iridium's
troubles could continue to have a negative psychological affect on the
stock price.
Stock Price Weakness - a Result of the "Iridium Over-hang."
Although more bad news may continue to flow out of rival Iridium, we simply
DO NOT embrace the perception that Iridium represents proof of concept
for Globalstar.
We strongly believe that MSS pricing must be in-line, with terrestrial
roaming rates. This means that satellite minutes-of-use (MOUs) must retail
for $1.50 or less. Globalstar should be able to achieve this price point
easily with its $0.14 per MOU wholesale breakeven point.
However, Iridium is NOT Proof of Market in Our View - Globalstar is in
a different business!
Iridium, with its unfavorable cost capacity structure, could find it mathematic
ally impossible to earn money on its satellite product at competitive
rates because its wholesale breakeven point is around $1.40 per MOU- or
a factor of 10X over Globalstar's.
As a result, Iridium must charge between $5.00-$7.00 retail per satellite
MOU to justify its costs and earn a margin. We strongly believe that
there is little or no market for this product. Satellite phones already
exist that retail for around $2.50 per MOU.
Notes from Monday's Globalstar Meeting (GSTRF- SB)
Service Providers - Some New Blood Coming. India and Brazil are the critical
markets.
· We believe that a few new service providers are likely to become franchisees
in parts of Asia, India and Brazil. Although Schwartz would not confirm
our thoughts, we believe however that Singapore Telecomm is likely to
step into the Asian/Indian slot, while AirTouch is a likely candidate
in our view to become a service partner in Brazil.
· Since many of Globalstar service providers are telephone companies,
the company believes, as do we, that Globalstar should avoid some of the
pitfalls experienced by Iridium in the distribution of product. Globalstar
management last week held an in-depth meeting with the company's service
provider/investors - the mood was reportedly optimistic and focused on
the details of service introduction. The service providers have paid
for and built gateways, know their local markets, and intend to simply
add Globalstar to the existing local infrastructure and menu of services
provided.
· Service Providers have Incentive for Success - They have skin in the
game!
· Globalstar partners have incentive to bring product to market for a
variety of reasons, including their equity positions in the company and
the ability to gain access to escrowed funds is conditioned on service
rollout.
New Management Appointees Expected - A Time for Positive Transition
Globalstar is developing into a Telecommunications company and is looking
to place an executive out of the Telecomm industry in the senior ranks
of the company. This can only be viewed as a positive in our view.
User Handsets:
· The newest version of the actual - working Quallcom handset is smaller
than working units we have seen in the past. The Qualcomm phone was just
a bit larger and heavier than a cell phone, most of the additional size
is due to its specialized satellite antennae.
· We expect that the handset production lines will be running at 40,000
per month by the end of 1999. Ericsson is expected to ramp up production
90 days prior to service introduction. (i.e. June).
· The phones are expected to cost $750 retail- eventually. Initial price
is expected to be $800-$1100. Some distributors believe strong demand
will enable them to mark up phones to about $1600 for early adopters.
We believe, however,
Gateways:
· The hardware for 38 gateways have been built by Qualcomm.
· Six gateways are already installed, eight are expected to be completed
by service start, including. U.S., Canada, China, Korea, Italy, France,
U.K., and Brazil.
· Service will initially be marketed in areas where gateways are operational.
Launch Campaign:
· Launch schedule is proceeding according to plans. The complete 48-satellite
system is expected to be placed on orbit by year's end. Service is planned
to start in 3Q99 using a 32-satellite system.
Subscriber Demographics
· Service providers are ordering equipment at a rate of 75% for mobile
service and 25% for rural fixed site telephony. The near-term focus is
on mobile extension in developing countries such as Argentina, Brazil,
China, and Russia.
· Rural fixed telephony is not an immediate focus for Globalstar, but
likely a service to be introduced within a few years.
Advertising and Marketing:
· Globalstar and its partners are planning a global print and broadcast
campaign in advance of the initiation of service.
· Tag line for campaign is expected to be "Taking Your Voice Above and
Beyond."
· Goal is to raise consumer awareness and brand product and service providers
at a local or regional level. .
· Start looking for ads around June.
$600 million gap remains till service introduction - Loral standing by.
Management is very much against issuing additional equity in Globalstar
any time soon. Schwartz would prefer to finance through debt. The thought
is that the funding gap is such a temporary issue, that the cost of borrowing
the funds should be nominal in the long run. We strongly believe that
Globalstar will achieve its financing requirements. Worst case scenario
in our view is that Loral will act as Globalstar's bank.
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