Globalstar L.P.: Numbers Are Qualitatively Important
By Karekin Jelalian
(thanks to Phillips Telecon)
Jeff Vayda
As Globalstar L.P. [GSTRF] (more) continues to stake the only remaining claim in
satellite-based, global, mobile PCS, in the short-term, revenues are not so important for keeping the
company afloat as they are for investor and satellite industry perceptions.
As seen in the chart, before even taking in any revenues or interest income during 2000, Globalstar
will have approximately $812 million to spend during the year (Merrill Lynch puts that number a
little higher, at $900 million).
The $812 million is more than enough to cover Globalstar's projected 2000 expenses of
approximately $610 million; it's even enough cash to take the company into the spring of 2001.
However, $250 million of the $812 million is a credit facility from Chase Capital Partners that
needs to be extended because Globalstar failed to meet revenue covenants by Dec. 31, 1999. Even
if Globalstar does not obtain access to the cash, the $562 million the company would have, before
revenue and interest income, would be enough to take Globalstar almost through the year.
All this is to say that, short-term, revenues w ill not be so important for Globalstar's solvency.
Revenues in the short-term will, however, be important for investor and satellite industry
perceptions and, in the long-term, for Globalstar's solvency.
Revenue Projections
Globalstar's projected revenue for the year is shown in Chart 2, with the most likely revenue
outcome in the $40 to $70 million range.
Of the many variables and scenarios factored into Chart 2's analysis, one commonality is that
minutes of use, subscribers, and subsequently revenues, probably all will be backloaded.
Since the revenue projections in the chart represent average numbers of subscribers for the year
and Globalstar is starting out well below those averages, the company will have to perform well
above the subscriber averages later in the year.
To put the average subscriber numbers in context, Globalstar would have to end the year with
155,000, 175,000, 195,000, 215,000 and 235,000 subscribers to average 80,000, 90,000, 100,000,
110,000 and 120,000, respectively, assuming the company had 5,000 subscribers in January.
Put in a different light, to end the year with 215,000 subscribers, Globalstar would have to add an
average of slightly more than 19,000 subscribers per month, every month, on a January base of
5,000 - a subscriber acquisition rate on which the company is most likely shy thus far.
As a reference point, mobile satellite service provider Iridium LLC [IRIDF] (more) had
approximately 3,000 subscribers at year-end 1998 (after two months in service), 10,000 subscribers
on April 1, 1999 (after five months in service) and has reportedly 50,000 subscribers today. But,
prospective users may have stayed away from Iridium once the company went into bankruptcy.
As another reference point, subscribers used Iridium's system between 20 and 40 minutes per
month, well below the 80-140 memorandum of understanding (MOU) range in Chart 2, and lower
still from Globalstar's projected 160 (blended fixed and mobile) minutes of use on its own system.
Hurdles to High Subscriber Numbers
There are a number of obstacles to subscriber and revenue success for Globalstar. To be fair, the
company is in an admittedly slow service rollout and is taking measures to correct subscriber
growth impediments, which are in Globalstar's control to varying degrees.
Still, the challenges bear mentioning and point to the importance of execution as a key factor in
Globalstar's success. The most important hurdles are the relatively high prices of handsets and
service, particularly in a global communication environment where people have gotten used to the
low prices and ease of use offered by cellular.
There's also the cloud cast by Iridium over mobile satellite services. Items more in Globalstar's
control include: eliminating roaming problems; making phones easier to use, for example, each
Globalstar user in North America has a satellite-mode and terrestrial-mode phone number; picking
up Iridium subscribers, perhaps with sweeteners, though Iridium subscribers may be once-bitten,
twice shy; and rolling out data services as early and as reliably as possible.
With all the uncertainty, and interest, in Globalstar, there are several items and milestones, aside
from Globalstar's success on the hurdles listed above, that can serve as early indicators of the
company's future. These items include:
quarterly results, particularly later in the year when the company has more system kinks
worked out;
the degree to which promotions and price incentives affect usage (how price elastic is the
service);
the status of the Chase credit facility;
cash on hand, changes in the cash burn rate, and changes in ease or difficulty of access to
more cash as the year progresses; and
how quickly and widely fixed service is rolled out (Globalstar has high hopes for fixed
service, citing service provider estimates of 500-1,000 minutes of use per month, but retail
rates may be too high and many billing and operational issues still need to be resolved).
Finally, taking a step back, it is important to remember that subscriber and revenue projections
keep falling and the fact that solvency now is creeping into the discussion is not a positive sign.
(Please contact Karekin Jelalian at 301/340-7788, ext. 2122, or via e-mail at
kjelalian@phillips.com.>)
Globalstar Projected 2000 Revenue Range*
(millions)
Average Number of Subscribers Per Month (thousands)
80 90 100 110 120
80 $30,096 $34,608 $39,120 $43,632 $48,144
90 34,608 39,684 44,760 49,836 54,912
100 39,120 44,760 50,400 56,040 62,244
110 43,632 49,836 56,040 62,244 68,448
120 48,144 54,912 61,680 68,448 75,216
130 52,656 59,988 67,320 74,652 81,984
140 57,168 65,064 72,960 80,856 88,752
*Assumes $0.47 average per minute wholesale fee. $6 million has been deducted from each estimate to
reflect $25 million of wholesale minutes sold at 25% discount.
Source: Company reports, Phillips Satellite and Space Group.Average MOU Per Month |
