By Mark Crossman and Anh Steininger

During an investor meeting held in New York on May 16th, Loral informed investors and analysts of the company’s progress since the end of the first quarter and reassured them of its focus in rapidly rolling out the Globalstar system. Loral posted lackluster results in the first quarter, reporting a net loss of $142 million, a step down from the loss of $50 million posted a year ago, as well as our estimate of a loss of $88 million. First quarter net revenues increased by only 4 percent year-over-year, to $318 million, due to minor revenue gains in each business segment, if any, during the quarter. In particular, data services (Cyberstar) and global mobile telephone service (Globalstar) contributed significantly to Loral’s first quarter losses.

Overall, Loral’s stock performance in the near-term is highly dependent upon Globalstar successfully rolling out its commercial service throughout the remainder of this year. Although Loral’s stock has sold off considerably since the beginning of the year, if Globalstar does not begin to show signs of success in 2000, the stock could trade even lower. As our previous estimates appear to have been too aggressive given Loral’s less-than-stellar first quarter performance, we have lowered our expectations across the board. We are lowering our EPS estimates from -$0.93 to -$1.88 in 2000, and from -$0.31 to -$0.90 in 2001. We are also lowering our 2000 EBITDA estimate from $409 million to $315 million, and 2001 EBITDA from $747 million to $731 million. We would caution investors that our earnings estimates are very dependent upon Globalstar generating $200 million of revenue in 2001. At this point, we are maintaining our long-term buy rating until we have further clarity on Globalstar.

Cyberstar, the data services unit of Loral, gained bookings and contracts but hardly contributed to Loral’s revenues. Revenues of Loral’s data services segment doubled year- over-year to $32.5 million in the first quarter, contributing only slightly to Loral’s total revenues. For the quarter, this segment posted an EBITDA loss of $9.7 million versus a loss of $6.7 million in the same quarter last year, due largely to one time charges from the purchase of the Global Access business television (BTV) service. Since its announcement of the long-awaited broadband strategy in February, Loral Cyberstar has drafted two contracts, totaling almost $6 million, with ISPs in the Middle East and Latin America, as well as two long-term contracts with ISPs in India. Cyberstar represents a long-term upside for Loral. However, Cyberstar has not yet struck any key strategic partnerships in order to bring in either content or subscribers to this project.

As expected, delays in the launch of Globalstar resulted in less than meaningful results for the first quarter. Globalstar reported first quarter net loss of $216 million, versus 1999’s first quarter net loss of $45 million and our previous estimate of $183 million. The increase in losses was largely due to the delay in rolling out Globalstar’s commercial services, which began in markets such as Australia, Brazil and Canada late in the quarter and therefore contributed only a few weeks of revenue. First quarter revenues totaled only $609,000 for the quarter, much lower than our estimate of $3.8 million. As of early May 2000, Globalstar was fully servicing 38 countries via 15 gateways. By year- end, the company plans to cover 121 countries by 27 gateways, which will cover 85 percent of the global market.

Globalstar signed up new customers and a few partnerships with service providers in various countries during the first quarter, which is slightly positive for future quarters. So far in the second quarter, Globalstar initiated roaming service in North America, South America and most of Europe. It also implemented the $400 per handset promotional program in 11 countries. In the third quarter, Globalstar expects to offer advanced data communications capabilities, such as fax, e-mail, IP data and short messaging service, to its customers, but revenues for the rest of the year are unlikely to make up for the large miss in first quarter revenues.

The agreement of five Globalstar partners to pre-commit $19 million worth of discounted minutes of use, the $400 promotional program and the rollout of new Internet access service features will contribute to Globalstar’s total revenue going forward. Nevertheless, these progressions will not contribute significantly to meet our previous estimate of 525,000 net new subscribers, with 288 million usage minutes by year-end. Instead, we expect Globalstar to add 120,000 customers by the end of December, recording a maximum of 50 million minutes of utilization.

Therefore, we have completely revised our estimates, lowering our 2000 revenue estimate for Globalstar from $137 million to $26 million. In the short-term, Globalstar will not be as successful in picking up new subscribers in the next few quarters as was previously anticipated.

In the shadow of Iridium’s failed global telephone service, Globalstar has had difficulty regaining investors’ confidence as it trades near its 52-week low. We believe that improved performance by Globalstar in the next few quarters will be important in building investors’ and the Street’s confidence in both Loral and Globalstar. The business remains a highly risky venture until Globalstar begins producing strong subscriber numbers. We are maintaining a buy rating on Globalstar because of the potential; however, we caution investors that GSTRF continues to be a very speculative play.

Marc Crossman and Anh Steininger are satellite analysts at J.P. Morgan in New York City. These views are those of the authors and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.