Globalstar, Inc. Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Globalstar 3Q 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Globalstar CEO, Paul Jacobs. Please go ahead.

Thank you very much, and welcome, everyone, to my first quarterly call as CEO of Globalstar. I'm joined today by Rebecca Clary, our CFO, and Tim Taylor, our VP of Finance, Business Operations and Strategy; and Kyle Pickens, our VP of Strategy. I'll start by making some brief comments, and then we'll spend the bulk of our time getting to your questions. But first, please note that today's call contains forward-looking statements intended to fall within the safe harbor provided under the securities laws. Factors that could cause the results to differ materially are described in the forward-looking statements and Risk Factors section of Globalstar's SEC filings, including its annual report on Form 10-K and for the financial year ending 2022 and as well as this morning's earnings release. So most of you who know me from Qualcomm will remember that my basic approach here to shareholders, analysts and the investment community is to keep the lines of communication open. I'm looking forward to getting to know more of our stakeholders and to that end, we'll be getting out to more events, and we posted several upcoming conferences earlier this week. For those who I haven't had a chance to meet or speak with yet, though a little background might be helpful. I have a long history with Globalstar going back over 20 years, and Qualcomm is also involved in other satellite businesses such as OmniTRACS and Lanware. Globalstar started life as a Qualcomm and Loral joint venture. In fact, it was 25 years ago yesterday that the first satellite call was placed on the network by my father, then CEO of Loral, Bernard Schwartz. More recently, we had an ongoing working relationship with James Monroe and Kyle Pickens. So why did I come back to Globalstar? I took the CEO job because I feel Globalstar has a rightsized platform, resource, and the great team, and one that fits with my vision of where connectivity is heading. The strategic business logic of combining XCOM Labs technology with Globalstar's spectrum assets provides significant differentiation as we address mission-critical wireless applications. Many of you know that XCOM Labs was already working with Globalstar on spectral efficiency to enhance throughput over Band 53. You might have seen me at the last Investor Day in New York City discussing those initiatives. I've had a front-row seat to a lot of the transformation over the last year, and the conversations that ensued earlier this summer concluded successfully. Bottom line, a number of us at XCOM Labs knew Globalstar's history, and along with the other folks who've joined Globalstar, we are really energized to be here for the next chapters. For my first 60 days, I spent meeting with customers and partners and reviewing our ongoing initiatives in areas such as enhancing our satellite constellation, evolving our legacy products, growing our IoT business, deploying private 5G networks, and others. We have been reviewing spectrum-related opportunities that Globalstar has been considering and how they align with initiatives at both Globalstar and XCOM Labs, with the goal of determining how best to capitalize on our spectrum assets. The team and I have experience in monetizing spectrum assets, including prior transactions at Qualcomm, which led to multiple billions of dollars of value creation. Partnerships that Globalstar has created open many new opportunities, and I'm excited by the scale of those partnerships and our ability to provide services to a large and ever-increasing number of people around the world. Amidst all the current wireless industry hype around satellite services, Globalstar has run its satellites for decades, and it's humbling to see how well our network plays a key role in saving lives, stories we're hearing on almost a weekly basis. A quick high level on our performance last quarter. As outlined in the release, Globalstar continued to sustain its record growth this year, with a significant improvement in profitability during the third quarter, driven by results from a 53% increase in total revenue. Service revenue increased 61%. We saw growth in Commercial IoT and adjusted EBITDA was up 125%. As a result, we're increasing the low end of our 2023 guidance. My focus will be on differentiating our offerings through innovation, growing the whole portfolio, and investing in R&D to position us for success, all of which we can do strategically and opportunistically. We have the current capacity to deliver solutions to customers globally, at scale and at competitive costs. In conclusion, I believe the transformation over the last year and performance to date reflects just the beginning of our efforts. We expect to elevate Globalstar in conversations with customers around the world. We have new satellites underway, an expanding Band 53 capable ecosystem, and new products coming online. So looking forward, our plan is to leverage these unique assets, our proprietary technologies, and our team's industry leadership to differentiate ourselves and create value in the space and terrestrial markets. Now I'd like to hand it back to the operator for Q&A.

Our first question comes from Simon Flannery with Morgan Stanley.

Great. I wonder if you could just touch on the latest on the constellation, where are we in the build process? And how does the timeline look from here? And then secondly, just give us a little bit more color on the pipeline because I think even before you came on board, the management team was talking about some pretty large deals in the pipeline that had the potential to be pretty significant. It'd be just great to get a sense of timing and how we are expecting to see some of these hit in the next few quarters? Or is this more of a longer-term opportunity?

Paul, do you want me to take the timing of the new constellation? I'm not sure if we're having audio issues, Simon, but thanks for the question.

Yes. Sure, I can hear you, Rebecca. Yes.

Okay. Perfect.

I'm sorry. Can you guys not hear me?

We can hear you now.

Are you unable to hear me? Okay, I'm sorry, I answered the question, but only to myself apparently. Did you hear my speech? Okay. So yes, sorry. Let me answer the question. I apologize for that. So for the constellation, we're in process and in design, and you guys actually help me whether we have announced publicly anything on the timing.

We have. And on our expectations for the 2025 launch is particularly where we talked about the timing for the MDA and most recently SpaceX contracts and those milestones are on track.

Okay. And then in terms of the spectrum deals. So when I came in, I just started to look at all of the initiatives that Globalstar has had underway, including the spectrum assets. So we don't have any update at this point.

Okay. And any more color on this point about investing more in R&D? Is that something that you're going to allocate a few million of OpEx next year as your revenues continue to ramp? Or how should we think about that opportunity?

Yes. So we're already investing in additional R&D associated with the evolution of the XCOM Labs technology, which was licensed. Then we also have other initiatives underway to build new products, and we're looking at ways that these things can be done to minimize the impact on the OpEx.

And our next question comes from Mike Crawford with B. Riley Securities.

Turning back to potential terrestrial spectrum license monetization by Globalstar. Previously, the company talked about two deals that apparently were thought to be near the end of a pipeline, one of which may have included some substantial NRE before even resulting in what I think the company characterizes as tens of millions of annual license revenue. And I'm wondering if those sentiments or statements remain consistent or have changed?

So we are in the process, like I said, of looking at sort of all the initiatives that Globalstar had underway before I got here. That would include spectrum assets and how we'll use those. Obviously, we have a lot more focus today on terrestrial private networks with the licensing of the XCOM Labs technology and with my team joining. We're really trying to make sure that we use our spectrum assets in an optimal fashion, and we have a lot of experience, as I said, in my reading comments in monetizing spectrum assets. So I don't have anything to update you on at this point, but we are working on that, and over the next period of time, we'll make our decisions on that as well.

As a follow-up, Paul, would it be fair to say that my understanding was that at least one of these deals was for an enterprise potentially with high-value assets that need to be tracked far from any cellular site that wouldn't necessarily interfere with the company's ability to maintain a holistic global spectrum asset that could be used in another fashion. Is that not the case?

Yes. There's a number of initiatives that were underway when I came, and so we're looking at all those. Obviously, whether or not they can coexist with the existing services, both on the satellite and terrestrial side, those are the kinds of things that we're looking at.

Okay. Given the fivefold increase in potential utilization of spectrum with XCOM IP, this should be an important differentiator when discussing private networks with companies. However, integrating XCOM IP into a market-ready solution—how far out are we from that? Is it still around 12 months away, or do we have a more specific timeframe for when we might see a deal that includes XCOM IP?

Yes. So XCOM Labs was working on productizing and working on pilots with customers using the technology. That was in CBRS spectrum. One of the reasons for the combination was that people who want to use cellular private networks are interested in mission-critical applications. If they weren't, they'd use WiFi. We've been using CBRS, but CBRS can come and go also. It's extremely differentiating to have the Band 53 asset and that spectrum, which we can guarantee the availability of to a customer who wants a private network for a mission-critical application. So that is underway. Now the timing of the deals, and I saw this in my life at Qualcomm, is that when you're introducing new technology, the start date is a little hard to predict because it's when a customer is willing to press a button to go on that new technology. We're very happy with how we've been proceeding with the customer trials, but we don't have someone who has pushed the button to say go. Our desire and expectation is that, that will happen within the next year. But as I said, it's always difficult to know when people are adopting new technology exactly when the start date is going to be.

Okay. And then I just have one final question. Given that your guidance excludes any potential spectrum licensing revenue? Why is there a $15 million range for fourth quarter revenue to what would be $44 million to $59 million?

I'll let Rebecca answer that.

Yes. Sure, Paul. Thanks for the question, Mike. So the range, as we've talked about before, is just due to the variability in our revenue predominantly. We do not have a fixed revenue source. There's equipment sales timing, there's seasonality, there's variable components under our wholesale capacity contract that may, in certain quarters as we've seen in the past 3 quarters, exceed the core elements of that fee arrangement. The timing of that, which is milestone completion based or bonus achievement based, is just unknown to get very precise, but we've closed the gap throughout the year, and now it's at a range that we feel is appropriate given the balance of the year.

Okay, Rebecca, just to follow up, even if there were no equipment sales, the service revenue would need to decline significantly to reach just $44 million for the quarter. What would need to occur for that to happen?

Well, I think you're probably just looking at a run rate. And yes, I mean, if you take a revenue year-to-date through September, divide by nine, times twelve, that gets you to that answer. But as we've said before, there are variable components, nonrecurring components, let's say, in the first nine months, and the nature of some of those items aren't necessarily expected to recur in the fourth quarter, right? And so after you make those kinds of adjustments, it is conceivable that we do see a decline in fourth quarter revenue, right? From the first nine months. So it's just allowing for some of that variability that's inherent in our service revenue.

Our next question comes from George Sutton with Craig-Hallum Capital.

Paul, you mentioned you joined Globalstar because it fits with your vision of where connectivity is headed. I wondered if you could put that in the context of more what you mean? Is that a direct-to-device statement? Is that a satellite plus terrestrial connectivity statement? Just curious what you meant by that.

Yes. I'm definitely excited by the combination of space assets and terrestrial, and some of the opportunities that we see on the terrestrial side, which we were focused on at XCOM Labs, can be enhanced by the opportunities to have space-based tracking. Logistics and transportation is a great example of that. So that's what I was intending to say. It's both about the private network and the convergence between satellite and terrestrial networks.

Got you. Could you give us an update on where the 2-way device sits in terms of potential beta customers when you might expect to have general availability there?

Yes, I don't have an update on that at this point, but the process is ongoing, and the technology is being developed. I've been focusing on reviewing those projects as I came onboard with some other engineering resources from XCOM Labs. So we still don't have an update on that at this time.

Our next question comes from Joe Galone with LightShed.

Paul, it's actually Walt Piecyk from LightShed. The past 30 years has been clearly a dramatic change in the wireless industry. You've been a key player in terms of affecting some of that change. I'm just curious in terms of specifically this direct-to-device market, like what is the end game here? What is the ultimate market opportunity in terms of functionality given what we are seeing with LEOs and some of the other technology that has existed? What are we going to be capable of doing? You can put a timeframe on it if you want, but just where are we going to get to? And it would be great if you gave a timeframe does that happen in the next 5 years, 10 years? Because it seems like a lot of people have perhaps undersized the functionality that can be accomplished and obviously, the revenue that can fall off of this?

Yes. I think there's a lot of expectation that more and more traffic will go to space-based technologies. That was the original idea of Globalstar, obviously, way back when. And then as cellular technologies sort of rolled out across the world, that market became more of a niche market. The question is, and there's a lot of people focused on direct-to-device and maybe pitching it as if that's going to be the main way that people get access. I don't necessarily believe that, but there are certainly plenty of places in the world where even when you have cellular coverage, you're not in coverage, right? You're in an area that says that it has coverage, but for whatever reason, you're shadowed or there's other reasons why you don't have access. I think the satellite technologies can be good for that kind of infill as well as, obviously, for just providing geographical coverage. We have cellular networks that have great population coverage, but there are plenty of parts of the world where we don't have geographical coverage. Now the lesson that we had in OmniTRACS at Qualcomm was even when we had a satellite system for long-haul trucks on even the main roads, they started out, you didn't have a lot of coverage. By the end, that business moved pretty much to terrestrial cellular because the satellite system didn't provide enough incremental value. These things where people are saying that you're going to have a lot of traffic go over satellite that, I don't necessarily believe at this point, but I do believe that direct-to-device is there. It has excellent use cases already. People will continue to try and improve functionality so that it can get to the point where we might do cellular infill.

I happen to live in a metro market, not far out of it. There are lots of gaps of coverage based on what I've heard the telco say in terms of their CapEx plans and what my neighbors are trying to do to hold back any type of development. I don't think we're ever going to see coverage in certain locations. So I can understand, I think the initial target in terms of messaging will I be able in these locations to get more than just messaging and hence, obviously expand that revenue opportunity? Is that the reasonable road map?

Yes. So I agree with you, it's cellular infill. It's areas where you might be in what would normally be coverage of a network, but you don't actually have coverage for whatever reason. So yes. And then in terms of being able to do voice, for sure, the Globalstar system originally was set up to do voice. The question is how many space resources are required per call that you're connecting as you connected at higher data rates. Now voice we can do over fairly low data rates, but that isn't really what people are using their phones for these days; people are using their phones for things that consume a lot more bandwidth. Bandwidth from space right now is relatively expensive to provide. As we know, people are looking to build these mega constellations. They have lived through some of that with OneWeb as well. You see people that are providing high speed right now are providing it using very large antennas. The question is, what's the affordability of that and what's the viability of that for mobile use and so on and so forth. These things are going to play out over the next few years. We'll understand those better and better. But I would just say that it takes a lot of space resources to serve a phone at high bandwidth, high throughput. That's just going to turn into cost. I believe that operators will make those cost trade-offs versus whether it's better to build out a terrestrial-based device or whether it's better to connect to a satellite when those services become more widespread.

On the last point, if they can achieve a return on the cost of paying for satellite capacity, they are clearly increasing charges for their customers annually. Everyone is projecting higher average revenue per user. If that capacity is necessary, do we expect to have only one satellite constellation, or will multiple constellations be needed to meet potential demand? Assuming the costs work for the operator, I would evaluate this based on the value of the data I can upload in my area, where I currently lack service, compared to the data costs in places where I do have coverage. This situation arises because the operators seem unlikely to provide coverage there due to either my neighbor's condition or their own capital expenditure plans. Therefore, the main question is whether there will be a single dominant constellation, whether there will be two or three, and what the future looks like in terms of the number of constellations needed to meet that ultimate demand.

Yes. I think, look, there are plenty of companies that are trying to compete in this mega constellation space. Obviously, there is one that's providing fixed wireless access right now. So yes, people are going to try for it. The question is, and as we've seen in the past, whether the economics actually work out remains to be proven because it goes to what you said, which is what incremental value is created for a consumer or an enterprise to be willing to pay the cost of providing that kind of capability through a space-based system. What we've been focused on at Globalstar is sort of the low end of the market, like what can we do that's cheap and ubiquitous, very widespread, can serve a lot of users; one of the ways of serving many users is that users don't necessarily need to use the system all the time. Providing that connectivity—not necessarily throughput— but connectivity is what's important, so that information can get back. If you need to focus on some given device and get more data out of it, that would be kind of the next step of it. So, in summary, it depends on consumer willingness to pay for having very high data rate connections through a satellite connection. That, I believe, remains to be seen.

Just one last question on that. Do you foresee that being achieved through the terrestrial spectrum being placed in satellites? The stuff that's already in the cell phones or the satellite spectrum being better utilized in the devices themselves?

I mean, it depends on the frequency band. Globalstar has a good frequency band for mobile devices. Some of the other ones are a little harder. But so I think most of what you've seen has been some combination, but it's been low-band spectrum. Some people are trying spectrum that's already been licensed for cellular technology. Others, like us, are using spectrum that was allocated for satellites. It's not really what the license regime is so much as what the bands are and how conducive they are to mobile use.

Which prefers low band is what you're saying?

Yes. I mean, the bands where we are seem quite good.

I'm showing no further questions at this time. I would now like to turn it back to Paul for closing remarks.

Great. Thanks, everybody, for joining us and for the great questions and the interest in Globalstar. Like I said, there's a lot underway at Globalstar right now. We're working on the new satellites, and we're working on new products and expanding the capabilities of Band 53. We have a lot of work to build out new revenues, both in the IoT space, in the private network space on our legacy systems and on our wholesale, so all the pillars of the company. We're excited about it. I'm really happy to be here at Globalstar, and I also just wanted to thank all the team members at Globalstar for their hard work this quarter and for the great results. Thank you very much, and I look forward to talking to you at the next earnings call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.