Globalstar Inc (GSAT)

[@LaughinPaulRyan]

FINANCIAL REVIEW

Revenue

Total revenue for the second quarter of 2020 decreased 3% from the second quarter of 2019 due primarily to a decline in subscriber equipment sales revenue, offset partially by an increase in service revenue.

Service revenue increased over the prior year's quarter resulting primarily from engineering service revenue related to a network feasibility study, which contributed an additional $2.0 million, while subscriber-driven revenue streams declined by $1.6 million. This decrease was due primarily to lower SPOT and Duplex service revenue.

The decline in SPOT service revenue in the second quarter of 2020 was due to lower ARPU and, to a lesser extent, fewer subscribers. Average SPOT subscribers were down during the second quarter of 2020 resulting particularly from involuntary deactivations of non-revenue-generating subscribers in Latin America over the last twelve months. On a pro-forma basis after adjusting for these subscribers, average subscribers and ARPU were down 3% and 5%, respectively, from the second quarter of 2019. The remaining decrease in SPOT subscribers during 2020 is due to fewer activations and elevated churn over the past twelve months. A meaningful component of our strategy to increase activations was to reduce service pricing, and thereby expand our addressable market. The decrease in ARPU reflects, in part, the impact from the new service plans rolled out in mid-2019 with rates below those previously offered. While the impact on the retail industry from COVID-19 is reflected in the decrease in SPOT subscribers during 2020, gross activations were up 16% following store re-openings in the month of June compared to June 2019, which is an early positive indication that our service pricing and plan options have positioned us well for growth.

The decline in Duplex service revenue was due primarily to fewer average subscribers driven by lower gross activations. However, during the second quarter of 2020, we continued to experience a higher volume of Duplex equipment sales, including our newest products, Sat-Fi2® and the new Sat-Fi2®Remote Antenna Station. We remain optimistic that this trend is a good indication of stabilization of the subscriber base.

Subscriber equipment sales revenue decreased $1.2 million in the second quarter of 2020 compared to the second quarter of 2019. This decline was due almost entirely to a decrease in Commercial IoT sales resulting directly from the impact of COVID-19 and the oil and gas industry downturn. While the volume of units sold for the quarter was down over 40% from the second quarter of 2019, we believe that our sales pipeline has not been reduced, only delayed. We also experienced a decline in SPOT equipment revenue resulting from lower prices due to e-commerce sales promotions during the second quarter of 2020. As with subscriber activations, we continue to see a rebound in sales of SPOT hardware devices following store re-openings in June, recognizing a 26% increase in volume sold during the month compared to June 2019. Duplex equipment sales were higher during the second quarter of 2020 as previously mentioned; this variance partially offset the unfavorable Commercial IoT and SPOT equipment revenue variances.

Operating Loss

Operating loss decreased from $16.7 million during the second quarter of 2019 to $15.4 million during the second quarter of 2020 due to lower operating expenses of $2.1 million, offset partially by lower revenue of $0.8 million. The decrease in operating expenses resulted from reductions in cost of services, marketing, general and administrative (MG&A) expenses, and cost of subscriber equipment sales, each of approximately $0.7 million. The decrease in cost of services was driven by lower R&D costs due to fewer product development efforts during the second quarter of 2020. The reduction in MG&A costs was due primarily to lower expected performance-based compensation costs. The decrease in the cost of subscriber equipment sales was directionally in line with the decrease in subscriber equipment sales revenue, however we recognized a narrower blended margin percentage during the second quarter of 2020 reflecting the SPOT hardware sales promotions.

Net Income (Loss)

Net income (loss) fluctuated $30.9 million from net income in the second quarter of 2019 to net loss in the second quarter of 2020. This change was due primarily to a $33.9 million decrease in non-cash derivative gains recorded during the respective periods. The conversion of the Thermo loan in February 2020 contributed to the reduction in derivative activity, as well as interest expense during the second quarter of 2020.

Adjusted EBITDA

Adjusted EBITDA increased to $9.8 million during the second quarter of 2020 due primarily to a $1.8 million decrease in operating expenses (excluding EBITDA adjustments), offset partially by a $0.8 million decrease in total revenue.