SSB Report Following Latest CC (compliments of GTR board)
SUMMARY:
Management hosted a conference call to discuss the price weakness in Loral and Globalstar. CEO Schwartz has been disappointed with results in the first few weeks of service, but has been addressing issues as they arise and has reasons to remain optimistic. Nothing points to an absence of demand for Globalstar's service. Previous guidance for 2000 (subscribers of 500,000 and revenues of $300 million) is still in place, but is looking less realistic. Management opened the door to revise guidance lower once better information is available. Our take is that the market has already anticipated this event. We remain cautious on Globalstar's near-term execution prospects because the company faces many risks beyond management's control. We reiterate our Outperform (2S) on Globalstar and our Buy (1H) on Loral, and recommend that investors buy Loral as the safer way to play Globalstar's upside.
HIGHLIGHTS FROM THE CALL:
1) Management claims that there is much misinformation out in the market and that nothing points to evidence of no demand for the product. Also, there are no issues of substance that are not being addressed. Having said that, subscriber take-up has been slower than expected for several reasons, including the need for service providers, distributors, and handsets to be in place before demand takes off.
2) Ericsson was late with production. At this point, 24,000 phones will have been shipped in the first quarter (with 13,800 in March). Production is ramping up to around 20,000 per month later this year. Another issue was that Type approval for Europe has not been received, meaning that the phone could not be legally sold in Europe. Total production from the three manufacturers is still expected to reach at least 500,000 by year-end.
3) Other issues: First, the need for having two numbers to use the service in the U.S. will be solved by mid-Summer. Second, management announced plans to reduce the price of handsets by $400. Third, roaming capability issues have been or will be solved by April. Fourth, Motorola is sending Iridium customers to Globalstar. A bounty on Iridium subscribers may help take-up rates. Finally, Globalstar could sign up the U.S. Government by the summer.
4) In terms of liquidity, the company will not need to raise cash in 2000 even if Globalstar fails to generate revenues this year. We point out that there is still a need for additional cash before the company breaks even on a free cash flow basis. Also, Qualcomm has signed the vendor financing agreement, which gives the company access to additional funds in the event that management fails to renegotiate its $250 million bank facility (which has nothing drawn).
5) To wrap it up, management closed by stating the number of minutes sold is not large, but is growing every week. According to management, the launch has been slower than hoped for. The hope is that things pick up in the second half. Finally, management reiterated its guidance for 600,000 phones shipped in 2000, 500,000 subscribers by year-end, and revenues of $300 million. The caveat, however, is that CEO Schwartz opened the door to lower guidance in the future once better information is available. The cost to make this disclaimer is low, in our opinion, because the market has already anticipated the weakness. Plus, the hedge allows management to maintain credibility if guidance is in fact lowered in the future because the warning was made.
LORAL IS THE WAY TO PLAY GLOBALSTAR:
Conceptually, we believe the risk in Globalstar is rising. Globalstar faces challenges, many of which are outside of management's control. While we commend management on its ability to address issues as they arise, our major concern is twofold: first, many risks have yet to present themselves; second, while we have not seen signs that point to a lack of demand for Globalstar's service, we have yet to see signs that point to robust demand for the service. Given that Globalstar trades above $12,000 per estimated end-2001 subscribers (versus $9,500 per existing subscriber for Echostar, which has demonstrated its ability to execute), we believe market prices imply near-flawless execution from here on out. Given the risks that we've seen up to this point, we recommend that investors purchase Loral as the safer way to play Globalstar's upside. As we wrote last week, current levels are an attractive entry point for Loral. While Globalstar's woes may put a cap on Loral's stock in the near-term, the price for the remaining businesses is compelling, and stands to reward the patient investor. |
