Mar 2, 2015
Executives
Rebecca Clary - VP and CFO Jay Monroe - Chairman and CEO Tim Taylor - VP, Finance
Analysts
Jason Bernstein - Odeon Capital James McIlree - Chardan Capital Steve Sweeney - Elevation Kevin Roe - Roe Equity Research
Operator
Welcome to the Globalstar Inc. Fourth Quarter 2014 Earnings Conference Call.
My name is Janet and I will be your operator for today's call. At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I would now turn the call over to Jay Monroe. Mr.
Monroe, you may begin.
Jay Monroe
Good afternoon everyone, this is Jay, Chairman and CEO of Globalstar. Thank you for joining us again today.
Before I make my comments on the business, Rebecca Clary our CFO will kick off the call with a review of the financial results for 2014. Following Rebecca's remarks, I'll provide an operational and strategic update.
We'll follow with Q&A and Tim Taylor will join us for that portion. As we begin, I'd like to note that this call contains forward-looking statements that are 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 statement section of today's press release and in the Globalstar SEC filings. I'll now turn the call over to Rebecca.
Rebecca Clary
Thank you, Jay. Good afternoon everyone.
2014 marked our first full year of operations with our second generation constellation in place. Our financial results showed significant improvement from 2013, driven primarily by successful product launches in sales and marketing efforts which led to 15% growth in our total adjusted subscriber base, as well as increases in both service and equipment revenue, and an almost 50% improvement in adjusted EBITDA.
Our Duplex business experienced 18% growth in service revenue in 2014 with ARPU up 9% and end of year Duplex subscribers increasing 17% to over 67,000 both after adjusting for the deactivation of the 26,000 suspended or non-paying Duplex subscribers during the first quarter of 2014. SPOT equipment revenue grew 38% in 2014 and average subscribers increased 8% to over 230,000 as of December 31, 2014.
Now focusing on our quarter-over-quarter financial performance. As shown on Slide 2, total revenue increased from $21 million in the fourth quarter of 2013 to $22.1 million in the fourth quarter of 2014.
This increase was driven by growth in both service and equipment revenue. We saw expansion in our subscriber base for Duplex, SPOT and Simplex reflecting the volume of units sold during the past several months and driving the increase in service revenue.
Service revenue from Duplex, SPOT and Simplex improved $0.9 million or 6% from the fourth quarter of 2013 with SPOT and Simplex contributing $0.8 million of this increase. The growth in SPOT service revenue was due to an 8% increase in average subscribers from the fourth quarter of 2013 to the fourth quarter of 2014 which was driven predominately by the introduction of SPOT Trace in November of 2013.
SPOT and Simplex were also the primary contributors to the 17% increase in total equipment revenue. The SPOT space drove nearly all of the increase in SPOT equipment revenue reflecting the successful introduction of this product into the market in late 2013.
Offsetting these increases was a slight decline in Duplex equipment revenue driven by sales product mix and reduced selling prices. We sold approximately 60% more handsets during the fourth quarter of 2014, compared to the prior year's quarter due to a successful rebate program which ran during the second half of 2014.
The reduction in selling price drove an increase in the number of units sold but decreased the revenue generated from these sales. These rebates also contributed to the increase in MD&A expenses as the portion were treated as subscriber acquisition cost.
Given the markets reaction to these rebate offers, we plan to continue to sell strategy into 2015. The reduction in selling price is reflected in the lower carrying value of our inventory.
Adjusted EBITDA for the fourth quarter of 2014 was $3.8 million reflecting a slight decrease over 2013 due to a $1.5 million increase in revenue offset by a $1.6 million increase in expenses both excluding EBITDA adjustments. Net income was $92 million for the fourth quarter of 2014 compared to a net loss of $235 million for the fourth quarter of 2013.
This fluctuation is due primarily to the change and value of our derivatives which resulted in a loss in the fourth quarter of 2013 and a gain in the fourth quarter of 2014. These valuation adjustments are driven primarily by changes in the stock price during the respective periods.
The 2014 quarter was also favorably impacted by lower interest expense and lower depreciation expense. Offsetting these items was an $8.6 million increase in the reduction of carrying value of inventory.
The inventory impairment charge recorded during the fourth quarter of 2014 related primarily to a reduction in the carrying value of Duplex phones and related antennas, ancillary parts and car kit bases. These targets were recognized after evaluating the Duplex inventory on hand and estimated timing of new product launches, as well as the current market value of these units.
And now for an update on our liquidity position. We ended 2014 with $69 million of which $31 million was a combination of cash in our Terrapin Line and $38 million was restricted for principal and interest payments on our senior debt facility.
In February 2015, we drove $10 million under our Terrapin Line leaving $14 million remaining that can be drawn through August 2015. Projected contractual obligations over the next 12 months included primarily tax service payments, and amounts due to our ground vendors for work being performed to upgrade our gateway infrastructure each were estimated to be $28 million.
Debt service amounts include semiannual principal payments due under the COFACE facility in June and December 2015, which totaled $6 million, as well as semiannual interest payments due under the facility and subordinated notes which in aggregate were estimated to be $22 million. To conclude, we've had a very busy year.
From a financial statement perspective, we have significantly reduced our outstanding debt balance decreasing the principal amount outstanding by $72 million. We've introduced exciting new products and service offerings and we have launched new initiatives to drive sales of exciting products, both of which have driven substantial growth in our subscriber base and in revenue.
And we have created new partnerships around the globe and have reengaged existing partners in our international subsidiaries to support them in their expansion. I will now turn the call back over to Jay, who will discuss with you all of the existing things we have in store for us for 2015.
Jay?
Jay Monroe
Thanks Rebecca. I'm pleased with the company's continued financial progress especially with our 47% adjusted EBITDA growth in 2014 versus 2013.
These improving results demonstrate Globalstar's value proposition and successful continuing execution of our operational initiatives. We are demonstrating the value of MSS services and making steady progress after a significant turnaround period.
Looking forward, we are confident in the continued achievement of substantial revenue, EBITDA, and cash flow growth in future years. These are all functions of our ability to successfully expand our subscriber base.
Each new customer provides high margin contribution and therefore we expect EBITDA growth to continue on its current trajectory. The ability to grow our base is a function of our focus on specific business tenants.
These include, expanding market share within our existing footprint, expanding our footprint to cover additional territories, introducing new lower price products with enhanced functionality and spending the resources required at quarter bearing sales reps in both our historic territories as well as new geographies. The team here is focused on strategic tenants and I'd like to thank all of our employees who execute against this daily.
Our organization is growing as we add new positions in engineering, product development, and of course sales to capitalize on our new constellation while preparing for a second generation ground infrastructure which is nearing completion now. 2014 represented the first full year of operations posted launch of our second generation constellation after many challenging years.
Completing the launches enabled us to begin the turnaround from an adjusted EBITDA as low as negative $14 million during the construction period to $17 million today and growing. Our footprint expansion, market share gains, new product launches will continue to expand our revenue base.
There were also significant unserved market opportunities in M2M, consumer tracking and voice, which are limited only by our legacy ground network which were about 10-months away from replacing in North America. This includes upgraded Radio Access Network's or RANs from Hughes network systems and carrier grade Ericsson core network infrastructure.
This enables speeds up to 25X greater than our current system and 100X greater than our competition. Hughes has now installed its third round at our gateways and Ericsson has installed the second generation core network at one site and is installing its second core now.
The second generation Hughes and Ericsson base ground system and device ecosystem allows us to manufacture in-self inexpensive consumer devices, including future iterations of Sat-Fi. Hughes and Ericsson are hitting their schedule milestones for completion of the primary North American gateways this year over the year testing is ongoing and going as planned.
They are on schedule and on budget. Hughes also provides us with the ability to deliver next generation chipsets at a small fraction of historical satellite chipset costs.
Our one way M2M business is very competitive in both cost and functionality, however, our Duplex M2M business will soon be able to compete in markets where we have little presence today as cost become materially lower. Where historic chipsets and modem boards in the satellite industry have often cost in hundreds of dollars, our new chips are closer to $10 and will enable new services that the market demands.
These will be available late this year and will enable expansion of our addressable market by significantly lowering the total cost for subscriber equipment. We all know how lower cost enable the adoption of mobile and wireless communications worldwide, for Globalstar the services we provide today are materially upgraded not years from now, but late this year.
We created an entirely new market in SPOT seven years and our next generation ground system will allow us to create many new markets again. The United States and Canada have been the company's core operating territory since the original constellation was launched 15-years ago and we continue to invest on these traditional markets.
We are doubling our North American simplex and SPOT sales force and adding sales resources for Duplex in 2015. We ran very successful holiday promotions for both product lines and have created plans already in the can for this year.
Our creative inexpensive new product introductions are increasingly relevance of satellite technology and satisfying our customers desire to remain safe and to be connected everywhere. We have a example, today SPOT of $100 product has surpassed 3,500 life saving rescues.
This is the very [eponymy] [ph] of increased relevance. On the international front, we initially focused on building out Brazilian operations.
After providing and upgrading the gateways in 2014, we increased the sales and marketing team to support diverse industries including oil gas, transportation, mining, government to name just a few. 2014 also represented the first year we invested so heavily in sales personnel in Brazil, as well as the balance of Central and South America.
Specifically, we have tripled our sales staff in these areas, the most came late in the year so didn't heavily impact 2014 results. 2015 should be a significant increase in revenue from these regions.
Our international effort includes strategic expansion throughout the balance of south and Latin America including new salesmen in Colombia and Panama. We have also entered into an agreement with TE.SA.M.
Peru, Globalstar's current IGOs partner for the Peruvian gateway, allowing us to sell direct there. A new gateway in Botswana is opened for business, which completes the Simplex coverage of the whole of Africa.
So Africa will get a lot of attention from us this year. We've accelerated the roll-out of our Sat-Fi technology, the first iteration in the line of future products which provide smartphone connectivity for both commercial and consumer applications.
Our current R&D efforts include reducing this products billed materials and decreasing the size to drive down the total price. We will get to a manufactured cost of $100 soon allowing us to price this product creatively and differentially market-by-market.
At $100 this product could literarily change communications in the 75% of the Global MSS that has no communications infrastructure. And as I mentioned before, there are numerous new products we will be introducing using the Hughes chip and the second generation ground infrastructure.
Yet again an airliner goes missing for an extended time and it's tragically found one week later. We continue to advance our plans for ADS-B over satellite in partnership with ADS-B Technologies.
We recently reported ADS-B completed a 7,000 mile comprehensive test flight using our Aircraft tracking system. This flight began in Alaska, traveled to the Gulf of Mexico and then back again.
It was the world's first full test for dual link space based ADS-B including extensive tests in virtually all flight environments. The flight showed that this technology works continuously by providing aircraft position reports in one second increments.
We will keep working with the FAA to certify space based ADS-B. I now want to mention the status of our FCC rule making.
As you know, the rule making has only been out on public notice since February of last year and the FCC is working hard to finalize it as quickly as possible. Recently we announced that our real-world demonstration of TLPS will take place in the FCCs office.
The commission agreed to host the demonstration at its technology experience center this week. Last Thursday, we publicly filled our demonstration plan and will of course file a complete Ex Parte Letter at the conclusion of the demonstration.
This demonstration will finish shortly but I'm unable to say more about it now and would be unable to answer questions about the demo today. Before we turn the call over to the Q&A, I want to discuss recent statements from short sellers Kerrisdale and GERST Capital.
Our short sellers are sometimes effective life for public companies, the recent commentary from these parties are not supported by sound technical engineering work, but by speculation, pseudoscience and in some instances deliberate technical distortion. This has created an environment of misinformation that takes Aims at our shareholder.
On the contrary, all of us at Globalstar remain focused on delivering value and positioning the company for long-term growth. We have many of the finest engineers in the country on our team, not unnamed technical resources that we so often hear about from the shorts.
In this week we will demonstrate that TLPS operates well using current infrastructure. Moreover, this is the only spectrum ever brought to market that leverages existing ecosystems so that the multiple year multi-billion dollar transceiver and related infrastructure development requirements are completely bypassed.
Uniquely, this spectrum will be available for consumers as soon as the FCC process is completed. We will then look forward to similar proceedings in other international markets.
Operator, we're now ready for the first question.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And our first question comes from Jason Bernstein. Please go ahead.
Jason Bernstein
Hi guys nice quarter. Jay I know you're not going to answer any questions about demonstrations but can you just comment real quickly on - there seems to be some semantic debt issue.
You guys filed an outline calling a demonstration and the opposition parties that call them a tech and there is an implication one is sort of suggestive, and one is mandated by the FCC. Can you just answer whether this is a demonstration volunteered by the company or is it an FCC mandated test that is going to go on record?
Jay Monroe
Jason for sure, this came about as a result of a meeting at the FCC a little bit ago and we offered to do a demonstration for the FCC. And then shortly after that meeting, the FCC and Globalstar spoke again and we decided to do that demonstration within the FCCs technology experience center.
So that's the history of it. I think the difference between somebody calling it a test and the FCC and Globalstar referring it to a demonstration is just semantics, I wouldn't read anything into that.
Jason Bernstein
Okay. And if I can get another question, and there seems to be significant momentum around Wi-Fi, we saw a few headlines today, Google announcing their project Nova, which will be heavily Wi-Fi centric and along with HP acquiring Aruba for their Wi-Fi platform.
Can you give us any update on where things stand with the quadrants you've outlined in the past around potential POPs interest?
Jay Monroe
The conversations that we are having with third-parties continue. And they are more relaxed as we characterized them before.
But I think the more front-end center Wi-Fi first discussion which is now taking place in the media, is something that we suggested even a year ago would soon come to the U.S. shores aggressively.
Remember at that time we talked about how it was sweeping Europe already in the predominant carrier and was a cable company, and that company was Liberty Global. Liberty Global has continued to extend their lead in that business over there and within the United States, we've seen devices which now permit Wi-Fi calling most notably the Apple announcements when the iPhone 6 came out and then SEMO talking about it aggressively and in fact even offering it for people as a mechanism to avoid high-cost roaming when they went to Europe.
And of course the most recent announcements that you referred to in the case of Google, but those were coming out from various parties almost daily, week or so ago was Cablevision, then the folks from Comcast made comments about it. Legacy pointed out the HP acquisition of Aruba is meant to be an attempt by HP to aggressively participate in the infrastructure side of what they anticipate will be a robust business model.
So I think all of it bodes well for our conversations, but I don't think I can comment more completely on any specific talks we are having.
Jason Bernstein
Okay. Thank you.
Operator
And our next question comes from Jim McIlree of Chardan Capital. Please go ahead.
Jim McIlree
Thanks and good evening. So Jay this FCC demo is something of your initiatives and so you're choosing the equipment to handsets the conditions and all of that, is that correct?
Jay Monroe
Jim, on the demonstration, we can't say anything more about the actual mechanics of the demonstration except for what was released when we put out our demo plan last Thursday, I'm sorry about that.
Jim McIlree
I was trying any way. And then secondly on the Duplex revenues and ARPU, and the net ads for the quarter, I missed the first part of the call so maybe you run into it but is there a specific reason why ARPU was down sequentially and it seem like net ads were up - it seem like net ads were weak as well?
Rebecca Clary
Net ads are up quarter-over-quarter about 20% or so, but just as it relates to ARPU that's reflecting really the seasonality in our business. So we were seeing more subscribers activate on usage base plans which the revenues recognized under usage base plan and based on usage, as opposed to unlimited plans which would be industry growing revenue recognition, which we've seen in previous years, that's a dynamic there.
Jim McIlree
And so, Q4 had a - is it dominated by these usage based plans or is that something we're just going to see the ARPU fluctuates from quarter-to-quarter by pretty by delta?
Rebecca Clary
Seasonally strong quarters, again our Q2, Q3 on first quarter and fourth quarter are historically pretty weak for us in terms of usage. So, given the percentage of this subscriber base on these usage base plans, I would really expect service revenue and ARPU levels to trend according to that.
Jim McIlree
I think in times past, the company has talked about ARPU of $35 to $40 for the Duplex is that still a reasonable expectation?
Rebecca Clary
I think that's a good average for the year and again that shift is going to be weighted more towards that $40 mark in the seasonally high quarters and then on the lower end of that range during quarters.
Jim McIlree
Understood. Okay, great.
Thanks a lot.
Operator
And our next question comes from Steve Sweeney of Elevation. Please go ahead.
Steve Sweeney
Hi, thanks for taking the question. I wanted to talk a little bit about aside from the FCC demonstration.
Some of the new experimental licensees that have been taken out in some of the markets, the filings that have been made, what is that – if you could talk about that little bit and what does it mean for the interest that potential strategic quarters might have in TLPS?
Jay Monroe
Steve, across the board, the conversations that we are having with parties eventually leave them want to see a TLPS roll-out in their own environments, and their environments are not only geography which might under live where their businesses are, but also geographies which are explanatory to them for one reason or another. For instance, if you do some sort of series of demonstrations in the market like New York City where Wi-Fi is very congested, the relative impact of TLPS is much greater than if you did it in the middle of a corn field in the Midwest simply because the way that TLPS shines is when everything else is blemished for one reason or another in this case because of interference.
And so people want us to operate it in those environments and make those results available to them, that's why you saw expansion of territories in Manhattan which were filed, expansion of territories outside of DC, expansion of territories in the Western United States. And I would foresee a good bit more of that as we get to the point where we do some deployments specifically for the parties we're having discussions with.
Steve Sweeney
Can you talk about whether these new markets or expanded geographies within the existing market we're testing, did it come from potential - did it come from the end keys that are testing already or did it sort of come from you guys saying alright, why don't we test in these markets, I mean which direction did it come from, was it your initiative or with the potential strategic partners that are testing, who asked for it basically?
Jay Monroe
I think those things are natural, they come up in conversation when people are thinking through what the opportunity looks like. And since we already have the ability with experimental licenses to operate in several of these markets, you can imagine that in conversation they said well, we'd like to look at our larger footprint.
Since those cases, but I don't know that it would - I can clearly say that somebody asked versus we asked it's more when you get into these discussions –in depth, things like this just come up and we offer the opportunity to them.
Steve Sweeney
Okay. And if I could have a follow up, I just wanted to ask the liquidity position you laid out pretty well in the press release and in the presentation.
I just wanted to get a handle on the use of the cash, if you can just clarify for the debt service is $28 million and the COFACE, I guess principal paydowns are $6 million.
Jay Monroe
Yes, so Steve for the year 2015, our total CapEx requirements totaled $28.2 million. And then, our principal interest in fees which is the combination of the COFACE interest, COFACE principal and then cash interest on our 8% notes for the year, that totals 25.9.
So the total capital obligations as of the end of the year stand at $54.1 million - exactly. And then from a sources perspective, you have $7 million of cash-on-hand at the end of the year, plus 24 million remaining in the Terrapin facility and then obviously your total availability for the full year 2015 depends on operating cash flow which even if we have to assume a run rate of where we are right now, which is between 20 and 25 for total liquidity is in excess of $60 million in -- totally independent of the DSRA which is restricted for principal and interest for the COFACE facility.
Steve Sweeney
Okay. And you drew down $10 million on the Terrapin facility at February, is that right?
Jay Monroe
That's right. So, 10 million was drawn directly from Terrapin with a modest increase cash balance post at the end of the year.
Steve Sweeney
Okay, great. Thanks a lot.
That's very helpful.
Operator
And our next question comes from Kevin Roe of Roe Equity Research. Please go ahead.
Kevin Roe
Thank you. Jay, had a couple of questions.
First, you mentioned several of the remarkable developments in the Wi-Fi space since your last call with Comcast, Google, Global Crossing, I don't think you mentioned AWS-3 auction. But Freewheel at Cablevision, everyone was expecting a Wi-Fi first product to come out from them, there is a first U.S.
cable operator to do it. But what's interesting to me about their commentary, is how they characterize the product as critical to their strategy.
Can you comment the Freewheel products specifically and how these developments in total have influenced your view on value of your spectrum and the timing of any strategic transaction and then I had a follow up?
Jay Monroe
Kevin obviously what's going on in Freewheel is somewhat to what's going on in the European examples as well as with Comcast and others. And I think there is no question whatever that the view on the part of the cable companies is that these Wi-Fi first services are critical underlined and exclamation points, because they know that in order to compete going forward, they have to offer a bundle of services, they are expected to experience some amount of attrition from their high paying cable bundle customers, and that pressure will come from over the top and so forth.
So they are going to have to replace it with something and without a doubt they've got a relationship with you, with your house already, or in your business already, so the add-on a service which they can under price rather dramatically and still make a healthy margin on under price relative to carriers product, is very, very interesting to them. If it was a perfect free market of course, you would say that the value of our spectrum goes up, as a result those forces because the cost of the infrastructure necessary to utilize Globalstar spectrum is so modest compared to the cost of building out a macro or small cell network.
So, we think it creates upward pressure post approval from the FCC and it should trend in the direction of the AWS-3 auction numbers but of course it's impossible to predict exactly when that will take place. But we remain very, very bullish about what the opportunity looks like for us using that cable business model.
Kevin Roe
Thanks Jay. And my other question was on the international side.
You mentioned in your prepared comments that post FCC approval that you'd move internationally. Can you share any efforts on the international side since your last call and what markets you’ll initially target for trust real approval?
Jay Monroe
For sure, I think what we've decided and we've talked about this on calls previously is to not make any substantial move internationally until the rules are finished by the FCC. And therefore we can import to other countries very specific set of rules that we work and with folks that we would want to do business with like the cable companies for instance.
And so it's important that we finish in the U.S. first.
There are logical places for us to go next. There are lot of places in the world that follow the FCC regime for two giant reasons, either they share a border with the U.S.
and therefore they have to coordinate spectrum all of the time, those will be of course Canada and Mexico. And there are other countries around the world that hue very closely to the FCC in terms of how they approve processes and they might do that because they don't have necessarily a large bureaucracy that can handle difficult and complicated technical issues and maybe they just do it because they respect what the FCC does and therefore its relatively speaking easier to take issues like this and just follow the FCC's mandate.
There are a lot of countries that fit into that category. And then lastly, there are lot of countries that Globalstar already has very deep relationships with because we operate gateways within their borders, and those countries are countries which we would target as well.
And you can just look at our gateway map, and reach a determination of what those countries are. But we are very optimistic that post approval here that we can begin to move into some of those markets within 90-days, not that it will approved within 90 days but we'll move into the markets and begin the process within 90 days.
Kevin Roe
Understood. Thanks Jay.
Operator
I'm showing no further questions at this time. I will now turn the call over back to Jay for closing remarks.
Jay Monroe
Thank you all for joining today. We certainly appreciate the time everyone spends with us quarterly.
Happy about our performance in the last year and very optimistic about what 2015 holds for us post FCC process given the strategic opportunities in front of us. Thank you all for joining today.
Operator
Thank you. Ladies and gentlemen, that concludes today's conference.
Thank you for participating. You may now disconnect.