C.E. UNTERBERG TOWBIN's VIEW OF CONFERENCE CALL
-KMeister
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* Recent management comments confirm our forecast of a slow service start. At an industry conference held yesterday, CEO Schwartz provided investors with an update on the service rollout. To start, Mr. Schwartz reported total billable minutes of use (MOU) for April were 118,000 minutes. This data point, however, comes from results of an average of only 7 to 8 countries (most likely the best performers) and not the overall service. At a rate of 118,000 MOU, the company receives approximately $47,000 in revenue per month. Given these figures, we believe the company will likely report first quarter revenue near our estimate of $370,125. Our first quarter rev estimate is based on monthly usage in exceed of the 118,00 per month. We are comfortable with our 1Q targets in spite of this for two reasons: 1) the 118,000 MOU is from only a portion of the system; 2) in the first quarter,Globalstar usage could exceed actual billed subscriber usage. For reference,the difference between Globalstar and subscriber usage stems from times in which Globalstar may have been billing service providers for minutes that were actually free to end users. Subsequent quarters should not experience this anomaly to the same extent as the first quarter because fewer gateways
will be coming on line at the same time as the service rolls out or service providers will better match the discount period offered by Globalstar.
* Mobile, per subscriber MOU levels may not be telling the whole story. Fixed phone details not available. Mr. Schwartz reported that mobile,per subscriber MOU were 140 minutes in April. There was no indication of whether the 140 MOU were billable minutes or not. We believe these impressive MOU are a result of free-minute promotions, which skew the average. The usage rates of billed handsets is likely to be well below the 140 level at present. Over time, we expect per subscriber MOU levels to taper down to approximately 40 MOU per user. To use these early results to
extrapolate the actual number of handsets in use is difficult because we would need a breakdown of the 118,000 MOU between mobile and fixed phones,as well as a reliable MOU figure. Obviously, for a rough estimate, one can assume that all 118,000 MOU are mobile and trusting that the per-subscriber 140 MOU is consistent across the service, derive total handsets outstanding to be approximately 840. We believe this figure is distorted by the high usage guidance (e.g., 140). Consequently, we expect actual revenue
generating handsets to number closer to our estimates of 3,000 to 5,000 carry a far lower monthly MOU level.
* Liquidity continues to be an issue, especially as key financings remain unclosed: Active negotiations with bank group over $250 million facility continue; Status of vendor financing for $500 million not clear. As of March 31, Globalstar had approximately $230 million in cash.Management
has indicated that the company now has a quarterly cash burn rate of $125 million and without a substantial ramp-up in monthly revenue or the closure of the $250 million facility and $500 million vendor financing ($400 million outstanding), Globalstar will need additional funding by late third quarter. This is a fact we realized and discussed in research just last month.Globalstar has until June to renegotiate its maturing $250 million (undrawn)bank facility. It is now clear that Globalstar had counted the facility as a source of funds when it asserts that it is fully financed for 2000 even if the company were to have zero revenues. We believe the real question is who will secure the facility, Lockheed or Loral, and not will the facility be obtained. Recent indications from Lockheed make us question the company's intentions to secure the facility. In addition, the company is still working to finalize $400 million of a $500 million commitment in vendor financing
from Qualcomm. Overall, we continue to be surprised by the status of key financings, as we believe tangible progress on both of these facilities should have already been made. Given that management is now analyzing scenarios without the financings, we now wonder if that is not an implicit indication of the funding status today.
* Global roaming now possible between North America and Europe, albeit later than expected.
* First quarter estimates stand; Reiterate Neutral rating. Based on results of our fourth Globalstar Distributor Survey, which was published in early April, we revised our first quarter-end subscriber count to range between 3,000 - 5,000, and we imputed approximately 788,000 billed minutes of use for the quarter. On that basis, we derive first quarter revenue of $370,000. From the information provided by Globalstar management yesterday,
we are confident that our estimates will be, at least, in-line with actual results and see little chance for any material surprise.
* The company will report first quarter earnings Monday morning with a conference call scheduled for 11 am. Call-in number 212-896-6007.
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