By Richard McCaffery (TMF Gibson)
March 27, 2000

Satellite telephone company Globalstar (Nasdaq: GSTRF) plans to cut about 25% off the price of its $1,500 satellite phones, and reduce per minute calling charges to bolster sales of its worldwide telephone service, according to a story in The Wall Street Journal.

Globalstar shares fell more than $2 to around $13 in early trading, within striking distance of a 52-week low.

Too bad the Journal has to break a story like this since the company told analysts all about it in a March 8 conference call. A handful of investment banks downgraded the shares after the call, citing lack of revenue visibility, worries about handset production meeting expected levels, and lower-than-expected average monthly use. Many investment firms remain bullish on Globalstar's long-term prospects but downgraded the company in the near term. It would have been nice if Globalstar let shareholders in on the news since its relied heavily on equity investors to get its system operational. "It certainly wasn't a matter of corporate policy," a company spokesperson said. "It was an oversight." Hopefully that means shareholders will get better treatment in the future.

At this point the key issue for Globalstar is subscriber acquisition and initial reports haven't been great. How many customers does it have? Unfortunately, its worldwide partners, which offer the company's phone services (Globalstar is a wholesaler), haven't yet provided subscriber counts so no one really knows how many subs have signed up since service started early this year. The company expects to issue the first counts in its April quarterly report.

Now, Foolishness generally means taking the long-term view, and investors shouldn't expect lightening to strike for Globalstar right away. The company is creating a new business in a worldwide marketplace -- a massive effort that's going to take time. Bugs are bound to emerge in handset production and service roll out. These problems are no big deal.

Nevertheless, Globalstar investors have to be focused on the short term since demand for its service remains highly uncertain. Will cellular build out gobble critical market share before Globalstar gets up to speed? Are the phones too bulky and too expensive? Can Globalstar weather a slower-than-expected ramp up of subscribers? Can it compete against less expensive regional satellite telephone systems like Indonesia's Asia Cellular Satellite?

Clearly the company is in a better position than Iridium -- its well-known rival that's in the thick of liquidation. It's not as exposed to short-term debt, has a much lower cost model, a better customer focus that highlights its system's ability to serve countries that lack telecom infrastructure, and its satellites are a good deal simpler.

But the company has a great deal riding on early success. After all, Globalstar has been promising robust demand for its services since 1995 and had raised or committed around $4.2 billion in financing as of September. With commercial roll out underway, investors are very keen on seeing what kind of demand exists. Globalstar officials expect around 500,000 subscribers and $300 million in revenue by the end of 2000 -- a very aggressive target. A Merrill Lynch analyst recently said 200,000 subscribers and $55 million in revenues is much more realistic, but even that is a very aggressive growth forecast, in my opinion. It's hard to put this number in perspective since there are few comparables, but Iridium didn't sign up much more than 50,000 subscribers. If Globalstar ends the year with 200,000 subscribers it's in great shape. A company spokesman said feedback from dealers has been positive, as well as responses from governments testing the phones.

Globalstar also has debt that must be repaid. It owes $250 million as early as June 30 unless it's extended or refinanced. Also, Globalstar's interest and operating costs are estimated at about $125 million per quarter. Debt won't be a problem through year-end since the company hasn't had trouble raising cash. On February 3 it raised $269 million selling 8.1 million shares in a follow-on stock offering, and on November 30 it announced plans to sell $150 million of convertible preferred stock. Still, the debt adds significant risk to the company's profile and Globalstar will have to sign subscribers quickly to keep its stock price afloat. If that doesn't happen, raising additional money won't be easy.

Investors that strongly believe in the system should take a closer look at Loral (NYSE: LOR), which owns about 42% of Globalstar. Loral builds satellites, has a fleet of communications spacecraft that offer fixed satellite services (for telephone calls, paging systems, etc.), and is developing a system to offer broadband services. It also trades at about 1.4 times book value.

Both companies should be thoroughly researched by any investors considering a purchase, but Loral is clearly the safer purchase and offers a back door into an ownership stake in Globalstar.

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