Q1 2024 Globalstar Inc Earnings Call

Participants

Rebecca Clary; Chief Financial Officer, Vice President; Globalstar Inc

Jay Monroe; Executive Chairman of the Board; Globalstar Inc

Kyle Pickens; Vice President, Strategy and Communications; Globalstar Inc

Simon Flannery; Analyst; Morgan Stanley

Mike Crawford; Analyst; B. Riley Securities

George Sutton; Analyst; Craig Hallum

Jeff Goodfellow

Charles Morris; Analyst; Greenhouse

Lyman Delano; Analyst; Beck Mack & Oliver

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Globalstar 1Q 2024 earnings conference call. (Operator Instructions)
This call is being recorded on Wednesday, May 8, 2024. I now would like to turn the conference over to Rebecca Clary, CFO. Please go ahead.

Rebecca Clary

Thank you, operator. And good afternoon, everyone. After my prepared remarks, Jay Monroe, Executive Chairman; and Kyle Pickens, VP of Strategy, will join the question-and-answer session.
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 for the financial year ending 2023 and its other SEC filings, as well as today's earnings release.
To start, Paul is not able to join today's call. Unfortunately, his mother passed away yesterday and he is focusing on his family. We send our condolences to both the Jacobs family and also to the family of Board member, Mike Lovett, who unexpectedly passed away two weeks ago. We are extremely grateful for Mike's valuable contribution to our company during his time served on the Board. While it is a sad time for the Globalstar team on a personal level, business has been encouraging.
Today, we are announcing our first-quarter results and providing operational highlights. We included a substantial update in our earnings release, so we will keep the prepared remarks section of this call brief. First, we achieved two significant milestones during the quarter, one satellite and one terrestrial. We initiated a contract with a government services company to utilize our satellite network for mission-critical applications.
The proof-of-concept phase is now underway. Assuming final go ahead after verification testing, the agreement has a five-year term and contains annual minimum revenue commitments escalating to $20 million during the fifth year, with the potential for significant upside through the agreement's revenue share arrangement. This opportunity represents a creative use of our satellite and spectrum assets, which does not materially utilize capacity we will use for our other customers.
On the terrestrial side, we shipped the first commercial units of our XCOM RAN last month, an enormous accomplishment for our team. As previously announced, the XCOM RAN was chosen by one of the world's largest retailers for a critical deployment. We are hopeful that this is not only the beginning of a larger relationship with this customer, but also the first of many more deployments for similar fulfillment management use cases.
Also worth noting that the XCOM team has managed to meet the needs of this customer in over-the-air testing, utilizing a 10 megahertz channel, showing gains of four to five times compared to other small cell deployments. We believe Band n53 and XCOM RAN are a powerful combination. `
Now turning to our financial results. We reported total revenue of $56.5 million, generated primarily from subscriber and wholesale capacity services, with service revenue up slightly from the prior year's first quarter. It's important to remember that the comparable quarter included certain non-recurring service revenue. Excluding this non-recurring item, service revenue would have increased by $3.7 million, or 7%.
For subscriber-driven revenue sources, commercial IoT continues to grow. During the first quarter of 2024, IoT service revenue increased 24% due to higher ARPU and a larger subscriber base. Subscriber equipment revenue was down $2.7 million from the prior year's quarter due to the timing of commercial IoT and spot device sales.
In 2023, we recovered from inventory shortages and experienced higher sales as a result of product availability. To illustrate this point, the first quarter of 2023 was a record high for any first quarter in the company's history for both spot and commercial IoT.
Moving to other areas of our financial performance, the increase in net loss was driven primarily by non-cash items. After adjusting for these and certain non-recurring items that aren't representative of our core operating business, adjusted EBITDA was $29.6 million, representing a margin of 52%. Importantly, both total revenue and adjusted EBITDA during the first quarter were higher on a sequential basis as well as compared to the quarterly average of 2023, reflecting variability in revenue throughout the year.
Based on these results and future expectations, today, we are reiterating our full-year revenue and adjusted EBITDA guidance issued in February. We are excited about how 2024 has started and even more so about what is yet to come in the balance of the year.
Paul, Kyle, Jason Bernstein, and I will be attending conferences on the East and West Coast in the coming weeks, with one presentation being streamed via webcast. So we look forward to speaking with you again soon.
I will now turn the call back to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Simon Flannery, Morgan Stanley.

Simon Flannery

Thank you very much. Good morning or good evening. Our condolences to Paul's family and to Paul. I wonder, Jay, could you talk a little bit about the pipeline just where we are today versus, say, three months ago? Certainly seems like there's some good progress here.
And then on the proof of concept, what's the timeline to getting final results from that and having it move into the next phase? And then finally, any updates on the constellation would be great -- the next constellation.

Jay Monroe

Great. Hey, Simon. I'm glad to do this, take it in the reverse order, if you will. The constellation remains on schedule. We anticipate launching in 2025, as we've conveyed previously. So that is all where it ought to be.
In terms of the work that we're doing for the proof of concept, that is a study and test that can go on for a few more months and then it will convert into the full contract. It can convert almost any time that they believe that the service that they're getting has been debugged in a way that they like it, and then they can convert to that service that we talked about before.
At the end of that five-year period, either party can -- or collectively, both parties can renew the contract so it can last longer, but it is set up fundamentally and initially as a five-year term.
Anything else on those two subjects, Simon?

Simon Flannery

No, I think that's fine. And I think the $20 million, you're sort of saying that that can be even larger if there is a revenue share component to that. I don't know if there's any more you can say in the nature of the service to help us visualize.

Jay Monroe

No, we can't say much. Yeah, we can't say much about what the actual service is, but what we can say is that we are optimistic that the revenue share component of it is substantial. It was structured this way for a number of reasons, but we are optimistic that because of the service that's being provided and to whom it's being provided that they'll use it a lot more in a lot of varied ways. So we're pretty optimistic that that will produce additional revenue for us.

Simon Flannery

Right. And then on the pipeline, just to understand the general level of activity.

Jay Monroe

Yeah. Kyle, do you want to take the pipeline? Kyle, are you on mute?

Kyle Pickens

Can you hear me now?

Simon Flannery

Yes.

Jay Monroe

Yes, we can hear you.

Kyle Pickens

Okay. Sorry about that. I was on my home pod and then it switched. So yeah, sorry about that. So on the pipeline, there's several different components of the pipeline. I don't know if you're referring to XCOM RAN or to Band 53 or to satellite, but I'll just talk about all of them, I guess.
So on the XCOM RAN, the first customer that we're working with, this global retailer that we've talked about, they could keep us pretty busy for quite some time. So I think that alone is a very substantial pipeline.
The other opportunities in MFC, which is this Micro fulfillment Center, where we're spending a decent amount of time, it's actually quite large. It's much larger than I would have even thought on the potential market. So we've been pretty active in going out to various trade shows and talking to the companies that are doing that and trying to explore where XCOM RAN could be beneficial to their deployments.
We're also continuing to work with other situations where -- I mean, I think one of the areas to focus on is where you have opportunities that are difficult, RF environments with large automated machinery moving around. So think ports where we're already active with Band 53, think shipyards and various logistics areas are very good opportunities for us to focus on. And we're spending time there.
On broader Band n53 opportunities, we continue to work with the ecosystem like the Qualcomm and Nokia and others looking for opportunities. It's similar types of areas where we're focusing, places where there's critical infrastructure, high-value deployments like mines, infrastructure, ports again, and that I think will be growing and building. One of the things that we've been working on is getting more 5G radios, which we're making good progress on that. So I think that will open up the market for that.
And then on the satellite side, the pipeline is, I mean, it's more kind of business as usual. I don't really have anything to highlight there, but the team is working on driving new products into the market as they always do.

Simon Flannery

Great. Thanks a lot for the color.

Operator

Mike Crawford, B. Riley Securities.

Mike Crawford

Thank you. Can you talk about what parts of your balance sheet you might be looking to attack first? Is your free cash flows coming, especially as they accelerate with success on XCOM RAN and Band 53 licensing?

Rebecca Clary

So from a leverage perspective, I'm assuming that's what you're referring to on balance sheet improvement. So that's, as you know, mostly under our service agreements. So we have the 2021 funding agreement, which is recouped or brought down against service fees that we earn about $8.6 million a quarter. And so that's steadily reducing. I think the principal outstanding is about $66 million in that range.
And then there's the 2023 funding agreement, which is about 50% of the total CapEx of our next-gen satellites that's funded over time. And so -- and that will be recouped in a similar way to the 2021 funding agreement. And so those are classified as debt under GAAP because of the terms of the agreements, but kind of substantively treated as deferred revenue in terms of pre-payment for service just in terms of how they get brought down, that principal balance gets brought down.
And then the third tranche is through third-party debt in our 13% notes, and I don't think we have any immediate plans to address those. They're paid half in pick, half in cash, and second lien. So market rate, at least at the time that we entered into them. So leverage is pretty good right now at under 4 times at the balance sheet date, and I think it's expected to go down over the next couple of years. So it's a pretty healthy level. I don't know if that's helpful, Mike, or if you have follow-up.

Mike Crawford

Sure. I mean, those 13% notes are [comparable], I believe, next March, but we'll see. And then getting back to incorporating Band 53 into XCOM RAN, is there -- what development work remains to be done there and when will that be a unified solution you can offer to the market?

Kyle Pickens

Yeah. As far as the exact technical work that needs to be done, I would defer to Paul. We can do a call with him later on. Originally, the XCOM RAN was based on a radio vendor called Baicells. We're taking more of that in-house, and so there's some technical work that the team needs to do. They are working on that right now. We think that we'll have some POC-type equipment later this year and then a more full commercial launch shortly after that.

Mike Crawford

Okay. Thanks, Kyle. And then just going back a couple of years now, there's been instances in the past where you've talked about perspective Band 53 customers or deployments, which -- have those other opportunities gone away or are they still in negotiation?

Kyle Pickens

Yeah. So that's a good question. When we brought Paul and team on, one of the reasons that -- I can say that I think they're the greatest wireless engineering team that anybody could have.
And so, obviously, when we bring them on, we want to use their strengths and have them look at all the opportunities that we have. And not only are they great wireless engineering minds, they're also great business minds. I mean, Paul and team built Qualcomm into a very, very substantial company.
And so we wanted them to look at all the opportunities. And it's Paul's company to drive going forward and decide how he wanted to move forward. And so he looked at all of the opportunities. There was, I think, two that we've talked about in the past. One of them we have moved forward on. They are paying us and will be deploying Band 53.
The other one we have not move forward with yet. We could potentially in the future, but we are not moving forward with them at this moment. We have, instead focused on the project, like Jay was talking about with the government service project that's very substantial and then things like the global retailer that we've talked about.
So there's lots of opportunities ahead of us. We're very -- as Rebecca commented in her prepared remarks, we're very excited about where we're going. But there's -- again, we had to defer to looking at all these opportunities and then high grading the ones that we think have the greatest long-term potential for the company overall.

Mike Crawford

Okay, thank you. And then final question just relates to the guidance. So what would be the major causes of variance between the low-end and the high-end range of revenue that you've indicated and are any spectrum license revenues consecrated in that guidance you gave?

Rebecca Clary

The answer is yes to the terrestrial piece, though other things obviously could solidify in the coming months. We're still somewhat early. That could make a difference. But as we sit here today, the transactions that we expect to impact revenues are included.
And so the variability is just that, right? I mean we're talking about a lot of new deals and transactions, some of which we have a lot of certainty around the timing and the amounts, others we don't have as much, right? So as we move into the quarters like we did last year, we'll tighten that range as appropriate or guide towards a particular part of the range.

Mike Crawford

Excellent. Thank you.

Rebecca Clary

Thank you.

Operator

George Sutton, Craig Hallum.

George Sutton

Thank you. Your deal with the retailer that you've mentioned you're working on certain Micro fulfillment Centers. That retailer obviously has substantially more facilities. I'm curious what kinds of things need to be done to move them to a much broader footprint?

Jay Monroe

Yeah. So hi, George. There's a couple of things. There's several internal things that they need to get through on some of their development issues. And then as far as our process is concerned, I think they're really kind of focused on some reliability work. But there's nothing that in our minds -- I mean, we're very confident about the service and product. I think they just need to see it work for longer and get more comfortable with it. But again, all the signs are encouraging so far.

George Sutton

So Qualcomm's come up a couple times on the call, and we had talked several months ago about Qualcomm creating a solution that they would take to market inclusive of Band 53. Can you give us any updates if there's progress there?

Jay Monroe

Yeah. There's definitely progress there. As a lot of you guys are aware, we're impatient and obviously trying to push things as fast as we can. But in the end, we're still a relatively small company working with a lot of really large companies. So it's progress and we keep pushing them constantly, and they've been very, very supportive. So definitely progress and we'll keep driving.

George Sutton

Understand. And then lastly, a geeky question, which Kyle, you would be perfect for. I think OTA testing using 10 megahertz gets you 4x to 5x gains. Can you just explain what that means?

Kyle Pickens

So the way that the system works, and as Jay and I tell people all the time, we're often confused for engineers, but we actually aren't. But the way that the system works is it effectively is allowing you to get the full capacity of all the radios that you can see in an area. And so a lot of times, as you add density -- not a lot of times, in other situations when you add density of radios, you're increasing the overlapping cells. And then you're therefore increasing the noise and capacity as a function of signal-to-noise ratio.
And so effectively, what they're saying is that with a 10 megahertz channel and multiple RRUs that you can see, you're getting all of the capacity of all the RRUs, or not all, but you're getting that kind of linear gain and capacity as you're adding RRUs. And that's basically what it is.

George Sutton

That was a very geeky answer. Thank you very much.

Kyle Pickens

Thanks.

Operator

(Operator Instructions) [Jeffrey Goodfellow].

Jeff Goodfellow

Hi, Jay. Jeff Goodfellow here. I'm wondering if I could get some colorful thoughts on two areas. One is the request for comments for the petition of rulemaking by your next constellation launch provider SpaceX, who wants to share Globalstar's spectrum apparently along with some other people, companies.
And second -- no, we'll just go with that. Thank you,

Jay Monroe

Jeff, you know that there is always a process going on at the FCC. And this service that we offer today is now in the hands of millions and millions of users globally. And it provides lifesaving services daily. So we are extremely comfortable with where we are at the FCC.
And there's always going to be a little noise in the background there. But the fact is that we've operated for decades with their help and we'll continue doing what we do today with the help of the FCC, and that's flying satellites, providing MSS services, and saving lives. They know that, our partner knows that. And we're very, very comfortable in that working relationship. So we don't expect any changes to the regime that we live with.

Jeff Goodfellow

Great. Thank you so much.

Jay Monroe

Thank you, Jeff.

Operator

Charles Morris, Greenhouse.

Charles Morris

Thank you. Good afternoon. Wholesale capacity services were relatively flat year on year. What should I infer about that as we look to growth going forward?

Rebecca Clary

Yes, thanks for the question, Charles. So we have disclosed before the first-quarter '23 included $6.5 million of out-of-period revenue. About half of that was non-recurring in nature. So if you adjust for that, we're up quite a bit. But that's where a lot of the variability that I refer to in my remarks comes into play as far as revenue.

Charles Morris

And that was on wholesale capacity services, that $6 million?

Rebecca Clary

Yes.

Charles Morris

Got it. Okay. Yeah, appreciate that. And yeah, thank you. Appreciate that. That's it for me.

Rebecca Clary

Okay. Thanks for the question.

Operator

Lyman Delano, Beck Mack & Oliver.

Lyman Delano

Good afternoon, gentlemen. My question was related to the decline by the FCC of SpaceX's license application for authority in your L and S band that was turned down at the end of March, and someone just addressed that a couple of minutes ago. But I was wondering if you could elaborate as to whether it is likely that SpaceX will continue to lobby and line up support for going back again to the FCC.
Jay, you said you were confident about your relationship, but I just would love it if you could reiterate that. And then one small question afterwards related to either a rumor or a report that the Mexican government some months back was putting up for auction your L and S band in Mexico. And I haven't heard anything more about that. And I wonder if you could elaborate.

Jay Monroe

Lyman, let's take the second one first. It would probably make some sense to check in with Barbee at one point or another on that process, but the process is effectively one that we are in the middle of and will participate in. And we're likely the only party that will do that for a number of reasons. But Barbee can give you, of course, a lot more detail on that when the time is right for you.

Lyman Delano

Okay.

Jay Monroe

On the question about people continuing to auger at the FCC for things, that's, as I said, gone on forever. And there are things that hang around the FCC for long, long periods of time and nothing ever moves on them. So I wouldn't be troubled about that. I would go up to 30,000 feet and look down.
And given the services that we provide, and now to the millions of users that we provide it to, and then recognize that it's a lifesaving service, we are very comfortable that the FCC will continue to do what it has done for Globalstar for decades, which is permit us to continue to operate our services, expand it as we have in the last years when we did our wholesale arrangement, as we're doing now with that government services thing that we've talked about.
And again, they'll just let us -- give us the room that we need in order to fly satellites and save lives. I just think that's the thrust of it. And there can always be stuff in the background, but I don't think it's going to dissuade the FCC from the path that they've been on with us for decades.

Lyman Delano

Thank you.

Jay Monroe

Thank you.

Operator

No further questions at this time. Thank you, ladies and gentlemen, for participating. This concludes today's call. You may now disconnect.