Temporary Stock Run-Up, Early Release Of 2Q Numbers Keep Eyes On The Company

While the future of Globalstar L.P. [GSTRF] is still undetermined, the company still is moving forward with its mission to provide satellite communications services as if none of the concerns that Wall Street and other analysts have exists.

Last week began with the tail end of a run-up on Globalstar’s stock, reaching as high as $12.25 during the spike, on a variety of unfounded rumors. And in spite of somewhat positive quarterly numbers, the run-up lost momentum and stock prices fell below $8 and closed at $7.83 at our deadline.

Rumors during this run-up ranged from acquisition bids that are looming in the not too distant future (takeover rumors are still flying) to influxes of new equity. Globalstar officials offered no comment to the rumors and sources within the industry noted that this latest round of scenarios connected with the run-up are unlikely to pan out into anything material.

However, there was some hinting by company officials that some new financing could be around the corner. The company has a number of options right now and its object going forward is to remove all doubt about liquidity, said Mac Jeffery, spokesman for Globalstar.

But financing will not be the long-term answer.

“Pouring additional equity or capital into this enterprise would be a reckless gamble,” said Roger Rusch, president of satellite consultancy TelAstra Inc.

…Earnings Shows Growth, But Numbers Fall Below Expectations

Financing is only part of the equation for the success of Globalstar going forward. All the financing in the world will not produce revenues, and while the numbers are moving in the right direction, Globalstar still has a long way to go.

The company reported 1,137,000 billable minutes of use (double that of the first quarter), and an increase of gross service revenues to $483,000 from $177,000. Globalstar also released its first subscriber numbers, with the total coming in at 13,000 subs by the end of the second quarter.

Globalstar’s spending on operations and interest expense was $97 million, an improvement on the company’s projected run-rate of $125 million, the company reported.

And while the numbers on paper appear to be moving in the right direction, industry insiders took a different view.

“Revenues and minutes of use (MOU) are disappointing for the quarter, considering that last quarter really reflected only approximately one month’s worth of operations,” reported New York-based Banc of America Securities.

And with only 13,000 subscribers right now, the future still looks shaky for the mobile satellite operator.

“The company will require roughly between 1.48 million and 1.85 million subscribers to arrive at cash flow break-even, assuming 50 MOU per user, and between 740,000 and 930,000 subscribers assuming 100 MOU per month,” added Banc of America.

“Under the most optimistic scenario, we see that Globalstar only has 1 percent of the customers needed to break even on operating costs after nearly nine months of service,” said Rusch. “In the future, royalties will not be a significant contribution. We do not think that the royalties will carry the program. In spite of this data, Globalstar says cash break even is 500,000 subscribers next year. This assertion simply is not credible.”

“The numbers are going to have to grow like wildfire to boost investor confidence,” said Karekin Jelalian, satellite industry analyst at Phillips Business Information Inc. Phillips is the publisher of MOBILE SATELLITE NEWS.

What is interesting to note is that in the midst of unfounded rumors, the stock price experienced a run-up, but following the release of improving numbers for the second quarter, the stock fell back again.

…Latest Drop In Pricing Likely To Have Little Impact

In an effort to bring in more customers, Globalstar USA, a subsidiary of Vodafone AirTouch plc [VOD], announced promotional satellite phone pricing to entice additional people to use the system where cellular service is not available.

The Qualcomm Inc. [QCOM] GSP1600’s manufacturer’s suggested retail price fell from $1,499 to $1,199. As an added incentive, customers who commit to the Freedom 20 or Freedom 120 pricing plans for 24 months get the phone for only $699 for the phone. But don’t expect a ramp-up of sales.

“Despite these efforts, we have seen no indication of an uptick in demand for Globalstar phones and remain skeptical about the company’s ramp-up of units in service,” reported Banc of America.

“We estimate that dropping the prices will not solve the problems for Globalstar,” added Rusch. “In fact, this move could actually reduce revenues and make the financial situation worse. We examined the pricing history of Inmarsat and the total revenues as the company dropped per minute charges from $6 per minute to $2.50 per minute. The total company revenue grew very slowly while the number of subscribers increased strongly. It did not result in an explosion of demand or revenue.”