The past few years have been challenging ones for Globalstar to say the least, with the degradation of its first generation satellite system coinciding with the global economic downturn. But having weathered a particularly stubborn storm, the company can…
The past few years have been challenging ones for Globalstar to say the least, with the degradation of its first generation satellite system coinciding with the global economic downturn. But having weathered a particularly stubborn storm, the company can now look forward with a new constellation up and running and high hopes for its North American spectrum plans.
SatelliteFinance editor Ed Ansell speaks with Globalstar chairman and CEO Jay Monroe to discuss the state of the satellite business and the potential spectrum play.
Ed Ansell: After months of negotiations you successfully restructured your Coface-guaranteed debt facility, as well as refinancing the convertible senior notes, do you anticipate that being the last time you will have to amend the facility?
Jay Monroe: Yes, we do. We always had an understanding with the banks that, while the process dragged on with Thales and the delays mounted, once we had the final launch date taken care of and the satellites were up and in service then they would alter the principle and interest repayment schedule by pushing it back to recognise the roughly three year delay. And so that is fundamentally what they did. Now it is up to us to run the business correctly and grow the revenue in the way that we had forecast.
We have effectively moved about US$250m of principle payments backwards in time and the net effect is that we don’t have a substantial principle payment until 2016.
EA: Have you also had to then shift your revenue forecasts to take into account that delay in service of your next generation system?
JM: Yes. If you think about how the business was always going to recover, it was about getting a satellite constellation up and starting to sell aggressively again.
What happened to us was we waited and waited and waited, and the last satellite went into service in August so we are now in a position to sell, sell, sell.
So really all we did was push the principle and interest repayment schedule back to recognise a start of a rebound in our revenue beginning at the end of this year.
EA: What do you see as the key driver to that rebound in revenue? The Duplex voice service, or the more mass market Spot product?
JM: We believe it will be both of those things. With Duplex, we have the ability now to get our customers that are already on the service on very low ARPUs to use the service more, and therefore increase the ARPU. Those are enterprise customers, our legacy customers for Duplex, and we are aggressively re-contacting them.
In that context, we are also aggressively reaching out to customers who have both Iridium or Inmarsat and Globalstar services, and trying to convince them of the error of their ways and the need to focus on just Globalstar.
EA: And how do you persuade your customers to increase their ARPU?
JM: If people have had our service and liked the service, but were unfortunately unable to use it as much as they wanted – and we know that because we know how many minutes of use they have on the service – we can now make offers to them where they are able to move up to a higher ARPU. For example, maybe we offer them twice the amount of minutes that they have ordinarily had but still at half the price of Inmarsat or a quarter the price of Iridium. So they naturally want to move because the price is so much better and the service in terms of voice quality that they get from Globalstar is demonstrably superior to both of those.
People want the service, and if you look at our ARPU numbers they have moved from where they bottomed out at US$14 a couple of years ago to on average US$22 now. So it is a big move and we expect it to continue for a period of time.
EA: So what is your Duplex ARPU target?
JM: I do believe that we will see an ARPU over the next couple of years that will be more like US$40. But at this moment we are re-establishing ourselves and having people look at the service again.
We are also out reinvigorating our distribution network, the dealers, agents and resellers who have direct relationships with customers in those vertical markets.
But we also have this entire other distribution channel which no one else has, 10,000 points of retail distribution. And we are now creating three distinct products for those retailers: Spot 2, Spot 3 and the Spot Phone.
So we are positioned in retail to sell phones in a way that creates a Duplex voice channel distinguishable from that first channel. And we have high hopes for that as it comes with all new customers who will come on at a new ARPU.
EA: SPOT is a mass market low price product, do you believe it can really offset the fall in revenues that hit Duplex following the degradation to your first generation satellites – or will it always be a small percentage of your overall revenues?
JM: I believe it is going to be the future. Our average ARPU on SPOT is almost half Duplex’s US$22 so you have to sell twice as many to generate the same revenues. But the opportunity is there to sell 200 times as many.
People that look at the satellite voice and data market, like Inmarsat and Iridium do, I believe are really missing the boat. There are so many more people that we can address through retail and mass market retail. If we can deliver a product that gets US$5 to US$10 of ARPU and, as in our case, is entirely internet activated and delivered, then our margin is basically 100%. We’ll take that all day long.
It is driven by price and functionality and as that price comes down, the market expands. It is a mystery to me why the other companies have decided that it is worth protecting their one high ARPU, high price market when they could have so much more. Well we will.
EA: So what is your market forecast for SPOT, particularly in North America?
JM: Traditionally SPOT is predominantly a product used by outdoor enthusiasts around the world, and that is a market that has some definition – we sell up to 100,000 units a year. But the new functions within SPOT allow it to be more appealing and it will be interesting to see whether we get beyond this outdoor market.
The underlying technology that we have in SPOT has now been reduced to a single small chip the size of your thumbnail. We’re building it for the M2M market but we can now build a device that is extremely small and much more power efficient, and sell it in the consumer retail market.
We are about to introduce to the market a product that we call SPOT Trace, which allows you to trace the path of any asset when that asset starts to move. Whether it is your teenage kid in the car or you want to track your vintage car or ATV, etc, you can put the device in it. It is a standalone unit that people will be able to use inside and outside of terrestrial coverage.
How big the market is for this we don’t know. I hope it gets out in the marketplace and people begin to talk about it. It’s a radical departure and this kind of product could sell exponentially more units. Could we be selling a million of these a year? Absolutely.
EA: You mentioned your next generation system being up and running, you have an option to purchase additional satellites, have you considered doing this and when would you do this?
JM: We don’t need more satellites in the near term but obviously long term you have to buy more satellites because it is a LEO constellation, and somewhere along the line you will do that. So it is not required in the next couple of years but in the long term absolutely.
EA: And is there still an option with Thales to order more second generation satellites?
JM: No, there is not technically an option. The previous contractual option no longer exists but we could always order more.
EA: With regard to the US$85m equity commitment that was part of the restructuring agreement, Thermo recently stated that it was unable to obtain commitments for at least US$20m from third parties, will you try to bring in other investors with the final equity tranche next year?
JM: You have to write these things a certain way for the SEC, but the reality was that we went out to the marketplace and they made an offer and that offer was too highly structured for my tastes, was expensive for us to implement, and would have added additional complexity to our capital structure.
So in our conversations with the investors we said to them ‘price this fairly, let’s do it as equity, most of you are already involved in Globalstar so let’s move forward and do this properly. The stock is going to move up as we are going to get a resolution with the FCC and people are starting to recognise the value of the spectrum’.
Well, certain investors cannot shake their old habits, to try and do everything cheaper and put structures around it. So finally we said ‘if you don’t want to do it the way we want then Thermo will just put the money in itself’, and that’s we did.
So how do those guys feel today? They had an opportunity at 55 cents per share to put in the money, they all whined and complained and said we have to do it at 45 cents. Well we did it at 52 cents and now they are looking at a stock price which has tripled since then.
We are currently in a position where raising more money is both less dilutive and comes at a time where they expect the value of the company to increase. So if we went out to that same group of investors and said ‘this is the price and if you don’t do it then Thermo will’, my expectation is that those parties would participate.
EA: So do you plan to do that, to return to the market but more on your terms? Would you like a better spread of investors or are you happy with Thermo’s majority control?
JM: We (Thermo) have a substantial majority control, around 75%. If we do bring in investors into the company, they would either be firms that we know and are long term holders of Globalstar or are extremely small retail investors. If that is the case then we would be happy to do the next raise in common equity not involving Thermo.
EA: How far along are we with the FCC process and when do you feel a final decision might be likely?
JM: The NPRM order is in circulation and could come out at any time now. The next process is faster; it is typically 30 days for people to comment on the order followed by 15 days to reply. That process of 45 days ordinarily gets extended a little bit so it may well be up to 90 days.
After those 90 days it is back on the Commission’s desk and they can make a decision immediately. Sometimes they do and decide within days if it was not a very heavily contested procedure; sometimes it takes them longer than that but at that point it is back on their desk for them to issue their final order.
So if I had to imagine our circumstances, I would suggest that from today to the final order could be about six months.
* Days after the Q&A took place, the FCC issued the NPRM order
EA: And how confident are you that they will approve the application?
JM: I’m highly confident. Everything that we are hearing from the Commission is that it is supported at every level of the Commission and we would hope that it would come out soon.
EA: And what role are Jarvinian playing in this?
JM: They are hired as an adviser to Globalstar on very technical spectrum issues.
EA: Your presentations mention providing the TLPS [terrestrial low power service] via a carrier grade network controlled by yourself, how would this work and who would fund the roll-out of such a network?
JM: The control is technical control of the emissions of the network and how it functions, so it won’t hamper the satellite operations. As long as the network is handled correctly, anybody can do that control for us.
In terms of how it might roll-out, you can imagine four groups of companies who are interested in this network and working with Globalstar to realise the network.
You have got the cable companies in the US who are building out hundreds of thousands of Wi-Fi access points so that they can provide their service to their clients, even when they are not in their houses. They are doing that across the US both to be competitive with the phone companies and also to provide a better service for their customers. If they had TLPS in those access points, the service that they could offer their customers would be terrifically better than the service that they are currently offering, because Wi-Fi right now is very cluttered and they deal with that everyday.
Then there are the tower companies who would like to use this spectrum and build a neutral hosting environment where they would be able to sell the service to all of the wireless carriers as Wi-Fi offload.
The third group of companies are the carriers themselves. And the carriers want to control as much spectrum as they possibly can, for many different reasons, but this is spectrum that would fall logically into their plans.
And last, and I think the most interesting both intellectually and from a business perspective, are the tech companies. The centre of gravity for telcos worldwide has shifted to South Korea and Silicon Valley. You have the likes of Google with Motorola Mobility and Android, Apple and the iPhone, Microsoft which recently acquired Nokia and owns Skype, and Amazon that is rumoured to be delivering four new tablet products along with some phone products. While in Korea, of course, you have Samsung.
So the tech companies want to run a competitive, proprietary channel where only their customers get premier service. It doesn’t matter if that’s Amazon wanting to make sure movies are delivered to their tablets in a seamless way that makes you want to buy Amazon Fire or Apple wanting to make sure that the reverse of that happens. The tech companies are all there.
EA: So have you had preliminary discussions with all of those groups?
JM: Yes, all of them. And I think we can work with all of those groups and all of those groups we would work with in a slightly different fashion because their needs are different and we’re flexible and can make decisions quickly. So we would work with whichever one made the most sense. But they are all waiting for clarity from the FCC.
EA: Since you have begun these talks, there has been speculation that this would make you a potential takeover target for one of these groups. Is this something you expect and have discussed or is the spectrum too inherently important to your future strategy?
JM: I think the spectrum is a very, very important part of the business. If you think of Globalstar you really have to think of it as a satellite business and you also have the opportunity through the spectrum to create another business.
That is really no different from most successful companies long term. Companies change and optimise their assets. With Globalstar we have two distinct assets, a new constellation with just a ridiculous amount of upside in it and the spectrum, which also has a ridiculous amount of upside in it. And it is up to us to figure how to best utilise it.
When you think about those four groups, anybody that wants to come and help make us more profitable, productive and creates a path for us to continue operations in spectrum and in the satellite business, we will have a conversation with.
EA: You speak of a distinct satellite business and a spectrum business, have you considered potentially spinning out or separating the company to maximise value?
JM: No, we are not thinking about that at this point.
EA: Have you made any forecasts on the potential future revenue split between the spectrum and satellite businesses?
JM: I think it is way too early to say.
EA: There is another FCC decision process taking place on the 3550-3650MHz spectrum currently underway, are you concerned that this process might impact the discussion you are having over your spectrum?
JM: No. The way that the TLPS system works is that it utilises all of the chips that are already in people’s devices that are actually able to see the TLPS channel but don’t today because of a piece of firmware telling the chip not to operate there. So we get to use the entire existing infrastructure, both access points and the device, meaning it can be turned on immediately.
For anybody to use the 3.5GHz spectrum, there will need to be a multiple year presentation and approval process at the FCC because it is not freely usable right now. And once that process is complete, then people have to build the infrastructure to do it. So it will happen one day but it won’t happen soon.
