May 8, 2016
Executives
James Monroe - Chairman and Chief Executive Officer Rebecca Clary - Vice President and Chief Financial Officer Timothy Taylor - Vice President, Finance, Business Operations and Strategy
Analysts
Jim McIlree - Chardan Capital
Operator
Welcome to the Globalstar Incorporated first quarter 2016 earnings conference call. My name is Adrian and I will be your operator for today's call.
[Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Jay Monroe, Chairman and CEO.
Mr. Monroe, you may begin.
James Monroe
Good afternoon, everyone, and thanks for joining today's call to review Q1 results. After my operational remarks, CFO Rebecca Clary will provide a summary of the Q1 2016 financial results and then Tim Taylor will join us for Q&A.
Our update today will be comparatively brief given the complete review provided about two months ago. It's important to note upfront that our view regarding further discussion of the FCC process remains consistent with our previous message.
Though we are quite positive on the outcome, in deference to the FCC's internal deliberations, we won't be providing additional information on the proceeding today. And also, although we wish we could, we're not able to field any questions about the proceeding during the Q&A portion of the call today for the same reasons.
We look forward to speaking to you again just as soon as we have additional information that we can share about the completion of that process. Please note this call contains forward-looking statements intended to fall within the Safe Harbor provided under the securities laws.
Factors that could cause results to differ materially are described in the forward-looking statements section of today's press release and in Globalstar's SEC filings. On the operational front, we remain focused on our core growth initiatives including commissioning the second-generation ground system, the rollout of new products across many business lines and expansion activities into new geographies.
After joining us in January as the company's President and COO, Dave Kagan has been leading all of these efforts. Dave is charged with driving the product, network and sales teams, as we continue to innovate and expand our MSS service worldwide.
He's doing a great job. From Q1 '15 to Q1 '16 our subscriber count increased by 38,000, as we approach 700,000 total subs and this contributed to an increase in adjusted EBITDA of 58% compared to the year-ago period.
This EBITDA increase was also driven by growth in high-margin service revenue from these new subscribers, while the company's operating expenses were well contained. Service revenue increased primarily due to growth in our non-North American SPOT subscriber base which grew over 20% versus Q1 of '15.
We saw similar growth in our non-North American Simplex subscriber base as last year's engagement with international value-added resellers produced solid results. A host of new partners around the globe have been engaged in product development and certification efforts for the new chipsets and our expanded distribution channels are delivering.
Non-North American Duplex subscribers, although producing reasonable growth of 10% had been weighed down by a series of macro factors including decreased commercial activities from existing subscribers in South America and a significant and continued slowing in global oil and gas markets. Although, we believe these macro factors will persist for some time, we also believe our success over the past two years outside of our traditional core markets serves as a model for expanding our global footprint abroad including greater growth from South and Central America, Africa and Asia.
We expect a combination of partnerships, acquisitions and greenfield opportunities in select markets to drive growth in 2016 and beyond. During the first quarter, we completed multiple final stage second-generation ground milestones.
Together with Hughes Network Systems, our engineering teams have finished all installations of the new radio access network equipment in the U.S., the Caribbean, Canada, and in Europe. Completion of the South American installation is expected in Q3 of this year after we secure local government certifications.
We're pleased to announce the Ericsson core network site acceptance and configuration acceptance testing was completed in Canada on schedule in Q1 following our 2015 installation and site acceptance in the U.S. Final production acceptance testing has been completed and geo-redundancy testing will be finished this month.
The last milestone for the core network requires what is known as gateway diversity testing. Diversity capability allows the network to route calls via seamless handoff technology between gateways and it's comparable to modern cellular technology.
It materially improves our call performance, subscriber experience and expands our coverage footprint. Of course, in order to leverage the capabilities of our new space and ground segments we must continue to develop new products.
As discussed many times, these development efforts are focused on decreasing the cost and the form factor of our commercial and consumer products while expanding their functionality and increasing data speeds through the all-IP network. On this new product front we have recently rolled out a series of commercial data devices including the SmartOne C, STINGER and the STX3.
We have developed these devices to serve a range of M2M and IoT sales channels, including value-added manufactures and resellers, OEMs and the direct-to-user channels. The newest products range from as simple as a standalone chip for certain channel partners to integrate into their own final product offerings to as complex as a fully integrated product for other channel partners.
The SmartOne C provides an asset ready solution directly out-of-the-box, easily installed, field managed without the need for any external equipment like antennas or power supply. On the other end of the spectrum, the STX3 is a satellite transmitter chip for OEMs that is one-third the size of the previous generation product.
This product allows OEMs and VARs to integrate Globalstar connectivity into products they build and sell for asset tracking and remote data reporting in markets including liquid petroleum gas tanks, pipelines, metering, automobile, container tracking among literally dozens of other markets. Positioned in the middle of these two is our newest simplex product the STINGER.
The STINGER combines the STX3 chip with an integrated antenna and a GPS unit providing a complete satellite module that can be embedded within third-party products. By integrating the antenna and GPS systems with the chip onto each simple board this latest product improves the ease of development for our partners and reduces certification time and expense for them.
Also in Q1, we received supplemental-type certificate for the FAA, general aviation antenna products market. This approval permits Globalstar's 1,700 handsets, first-generation Sat-Fi product and SPOT Trace to be integrated directly into the cockpit communication system.
SPOT Trace will track a plane's location every 2.5 minutes, while our other voice and data products provide pilots and passengers with the ability to make and receive calls, update travel times, change flight plans, arrange for services upon touchdown and stay in touch with family, friends and colleagues. This opens up a market for us of thousands of general aviation pilots who can now have access to reliable and affordable connectivity.
We're signing up a number of aviation partners and expect product deliveries before the end of this quarter. Product development efforts are also nearing completion for our next-generation SPOT and Sat-Fi devices.
The new SPOT product will be introduced first and will feature two-way capabilities allowing subscribers to both send and receive messages along with all traditional SPOT tracking and SOS features. Sat-Fi 2 product development is also ongoing and will provide enhanced data speeds and a much, much smaller form factor as compared to the first-generation device.
Final pricing will be set when the product is commercially introduced, but directionally it will be just a fraction of the price of Sat-Fi 1. Now, I will turn the call over to Rebecca.
Rebecca Clary
Thank you, Jay, and good afternoon everyone. As Jay mentioned this quarter was highlighted by subscriber growth driving increases in high-margin service revenue and adjusted EBITDA.
Today I will discuss the primary factors impacting these and other key operating metrics and will also provide an update on our liquidity position. First, total revenue increased $800,000 or 4% compared to the first quarter of 2015, driven primarily by growth in our subscriber base with average Duplex, SPOT and Simplex of subscribers up 13%, 10% and 5% respectively.
Our total subscriber base increased by 38,000 users from the prior year's quarter resulting primarily from a 22% increase in subscribers outside of North America; continued pressure on revenue from currency exchange rate effects and a decrease in equipment selling prices partially offset this growth. Total service revenue increased $1.6 million or 9% during the first quarter of 2016 compared to the prior year's first quarter, resulting primarily from significant growth in our SPOT subscriber base and higher SPOT ARPU.
These improvements drove a 21% increase in SPOT service revenue. Gross SPOT subscriber additions, which were up 11% during the last 12 months compared to the preceding 12 months, propelled this growth.
The ARPU increase was driven by the higher price tracking features associated with our most popular SPOT device. Duplex service revenue, which increased $200,000 or 3%, during the first quarter of 2016 was up due to a 13% increase in our average Duplex subscriber base, but continues to be burdened by lower ARPU compared to 2015.
The strengthening dollar and more aggressive collections efforts drove the almost $3 decrease in ARPU. We continue to see a significant disconnect between the amount of billings from our international subsidiaries and the revenue recognized in our consolidated financial statements due to changes in foreign currency exchange rates.
This scenario particularly impacts our Canadian subsidiary where total billings increased 16% in Canadian dollars but service revenue decreased 8% in US dollars. As it relates to our collections efforts, we have been more aggressive during the last several months in suspending service to subscribers promptly if we do not receive timely payment.
Because we recognize revenue for suspended subscribers only when payment is received, the higher number of suspended subscribers during the first quarter of 2016 negatively impacted revenue and ARPU compared to the first quarter of 2015. Revenue from equipment sales decreased $800,000 in the first quarter of 2016 from the prior year's first quarter.
Over 80% of the decrease was due to lower Duplex equipment revenue driven by a reduction in the selling price for handsets beginning in certain markets during March 2015. This strategy, designed to increase high-margin Duplex subscribers while also reducing inventory in advance of new products has been successful, as measured by a 20% increase in the number of phones sold compared to the first quarter of 2015 and a 46% increase when comparing the last 12 months to the preceding 12 months.
We now are working to develop strategies that will allow us to maximize the value of our remaining in inventory, while continuing to generate increased service revenue. Net loss decreased $103 million or 79% from the first quarter of 2015 due primarily to a $107 million decrease in the non-cash loss recognized from the change in derivative liability values between the respective periods.
As we have discussed previously, our balance sheet includes derivative liabilities associated with certain borrowing arrangements. These derivative values can fluctuate widely based on various inputs but primarily are driven by changes in our stock price on the beginning and ending dates of each reporting period.
Adjusted EBITDA increased $1.8 million or 58% during the first quarter 2016 compared to the first quarter of 2015. This increase was due to an $800,000 increase in revenue coupled with a $1 million decrease in expenses excluding EBITDA adjustments.
The decrease in expenses was driven almost entirely by lower cost of subscriber equipment sales. Similar to the decrease in equipment revenue, approximately 80% of the decrease in cost of subscriber equipment sales is due to Duplex as handsets sold in the first quarter of 2016 had a lower carrying value as compared to those sold during the first quarter of 2015.
Additionally, while MG&A was generally consistent with the prior year's first quarter, an increase in personnel costs due primarily to growth in our global sales force was offset by a bad debt recovery during the first quarter 2016 each of which were approximately $400,000. Now an update on the company's liquidity position.
As of March 31, 2016 we had liquidity of approximately $104 million including an unrestricted cash balance of $12 million and $38 million held in a debt service reserve account, which is restricted to making principal and interest payments due under the COFACE facility. We also had $53.5 million under our common stock purchase agreement with Terrapin following a draw of $6.5 million in February.
We can draw this remaining amount through August 2017. Projected contractual obligations over the next 12 months include primarily debt service payments due under the COFACE facility and capital expenditures that relate predominantly to the work being performed to upgrade our gateway infrastructure.
Debt service amounts include semi-annual principal payments due under the facility in June and December 2016, which totaled approximately $33 million, as well as semi-annual interest payments due under the facility and subordinated notes, which in aggregate we estimate to be approximately $22 million. We estimate that ground-related cash obligations will be approximately $7 million during the next 12 months in addition to $4 million in other capital expenditures.
We expect to fund these contractual obligations through a combination of cash on hand, operating cash flows and draws from our Terrapin agreement. In summary, we continue to focus our efforts on expanding the business, while maintaining spending discipline.
Our penetration in new and legacy markets and attractive equipment pricing have propelled gross activations leading to high-margin service revenue and increased adjusted EBITDA. We are optimistic that these trends will continue as we expand globally, introduce new rate plans and prepare to launch evolutionary products currently in the pipeline.
I will now turn the call over to the operator for Q&A. Operator
Operator
[Operator Instructions] And we have a question from Jim McIlree from Chardan Capital.
Jim McIlree
The inventory of the old generation of handsets is that significant or are you still working that inventory off?
James Monroe
Jim, we have sufficient inventory to take us into the first quarter of next year for those types of handsets, but well before that we'll have the second generation of products available. So there will be a bit of an overlap there.
And we'll end up with additional generation-one handsets that we can sell. After generation two becomes available gives us opportunities to do things in foreign jurisdictions as well, but I think we're in good shape with that.
Jim McIlree
Let me ask it a little bit differently. So in order to hit the plan that you are contemplating, will you need capital for -- will you need cash for working capital or you're going to be able to liquidate the gen-one handsets in order to fund the working capital needs for the rest of the business?
Timothy Taylor
So Jim, on the liquidity front obviously the depletion of our 1,700 handsets creates cash and so that is certainly part of the operating cash flow to fund CapEx and principal and interest payments over time. But in general on the liquidity front we ended the quarter with about $12 million of cash.
We had about $53 million left in the Terrapin facility, $38 million in the DSRA, although as you know that is only available for principal and interest and it's fully restricted, so unrestricted liquidity of about $65 million to end the quarter with total commitments including CapEx, principal, and interest in 2016 of $61.3 million. So we have enough liquidity to get us through the end of the year and that is exclusive of any operating cash flow that we generate over the next three quarters.
Jim McIlree
And how does that DSRA work? Is that flat through 2017 or is there an increased amount that's required as you go through this year and into 2017?
Timothy Taylor
That is flat. It's increased once before a couple of years ago, but the max is $38 million.
And it will remain so until the termination of the facility.
Jim McIlree
And next year 2017 there's a step up in the principal repayment, is that correct?
Timothy Taylor
That's correct. So principal through December 2017 for just the year is $76 million and total interest and fees is about $42 million.
So let's just assume on a conservative basis that we're just going to do a run rate of call it $30 million operating cash flow for 2016 and 2017, so completely flat with no growth through 2017. You would be able to get through the end of 2017 after fully tapping Terrapin, having the operating cash flow generation, and you would have a shortfall of about $61 million through December 2017, so the need to raise capital before the end of 2017.
Jim McIlree
So given that, I'm trying to respect your no TLPS questions, so if I'm violating it excuse me, I'm not trying to be difficult. Tim, are you contemplating looking at spectrum reallocation in geographies outside of North America potentially starting that this year or next year?
Timothy Taylor
I think for the moment, Jim, anything on the TLPS front is something we're not comfortable talking about until after the FCC process is complete. So I'd rather not have a discussion about other markets.
Jim McIlree
How about on the OpEx -- well no, I think Tim just answered it. So roundish numbers $30 million in operating cash flow for this year and next kind of gives me an indication of what you're thinking in terms of the growth as well as OpEx or were you just doing that kind of, Tim, as of back of the envelope kind of way to look at things?
Timothy Taylor
Yes, I think we would be very disappointed if there's no growth '17 over '16. So that is just for liquidity purposes where we always look at things on a very conservative basis and we're forecasting liquidity.
So that was just an example back of the envelope.
Jim McIlree
So as we look into 2017 Duplex, where do you think the major growth is coming from? Are you still hopeful that Duplex can accelerate from here or are you thinking that there's other areas where you are going to see service revenue grow?
Timothy Taylor
I think the main areas of growth relate to the new second-generation Sat-Fi product, which is Duplex, and also our new next-generation SPOT product, which rolls out in a couple of months. And obviously, I think that we're going to have continued growth in the core markets in the U.S.
and Canada, but I think most of the growth is going to be new product driven in non-North American markets with those two new products.
Jim McIlree
And the covenants on the debt, how are you relative to those for this year and into next? Are you starting to brush up against any covenants?
Timothy Taylor
The covenants for the first half of 2016 for the adjusted consolidated EBITDA that is about $24 million and for the second half of 2016 is about $32 million. And so and so in terms of the equity cures we have equity cures through the end of the year and we would time any capital raises including those coming from the Terrapin facility in order to satisfy any equity cure requirements.
Jim McIlree
And what are those EBITDA requirements in 2017?
Timothy Taylor
In the first half is $32 million, in the second half I believe is $41 million.
Jim McIlree
Do you have the same equity cures available?
Timothy Taylor
We do. End of Q&A
Timothy Taylor
Okay, operator, thank you very much. We have no additional questions at this time.
Thank you all for joining and look forward to getting back to people, perhaps even before we have our next quarterly call, with an update on the FCC. Thank you very much.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thanks for participating and you may now disconnect.