What’s happening with TerreStar’s Genus phone?

Posted in Financials, Handheld, Operators, Spectrum, TerreStar at 11:09 am by timfarrar

TerreStar Networks has now filed its Monthly Operating Report for December, which gives details of its revenues and cost of goods sold (COGS). In December 2010, TerreStar reported total revenues of $113,479 against a total COGS of $615,155, which compares to revenues of $91,626 and COGS of $125,189 in November 2010. However, TerreStar has not stated whether it is in compliance with the terms of the DIP Agreement, which requires both the “Roam-in Revenue” and the “number of subscribers” to be no less than “85% of the amount set forth in…the Agreed Budget and accompanying projections” as of December 31, 2010. The target number of subscribers is not disclosed in the DIP Agreement, but the Agreed Budget details the Roam-in Revenue (i.e. excluding handset sales) as $89,000 for December 2010. Under the DIP Agreement, this information should have been made available to the “Administrative Agent and the Lenders” (although not necessarily disclosed publicly) within 3 business days after the end of each fiscal month.

Due to the lack of any breakdown for the December revenues in the Monthly Operating Report (and the completely inaccurate supporting comment that “Our revenue currently is derived primarily from a spectrum-leasing agreement”, when in fact it is TerreStar Corporation that has a spectrum leasing agreement with Harbinger), it is quite hard to determine whether TerreStar is meeting the covenants in the DIP Agreement. At an ARPU of $50 per month for the Genus phone as envisaged in the Blackstone business plan, then there would need to have been an average of 1780 Genus subscribers during the month to produce $89K of service revenues in December. However, my assumption is that the real ARPU for TerreStar (once AT&T’s share of the revenues is subtracted) is significantly lower than this figure, implying that potentially in excess of 5000 phones would need to have been activated by the end of December (to produce a month average subscriber base generating sufficient revenue) to meet this target.

It is hard to tell how many phones were shipped to distributors prior to November, as TerreStar has not filed a 10-Q for the third quarter of 2010 or a monthly operating report for October 2010. It is possible that no new phones and accessories have been sold to distributors, and the vast majority of reported revenues in December were “Roam-in” service revenues from AT&T. However, TerreStar reported COGS of over $615K in the month, and it would be somewhat surprising if this was all free equipment for demos, replacements, etc. (especially as we understand TerreStar did not originally intend to supply free demo phones to distributors). Notably, the Agreed Budget envisaged $321K of equipment sales during December, which far exceeds the total revenues actually generated during the month. Given the rapid expansion in “Roam-in” revenue in what was disclosed of the Agreed Budget ($10K in October, $40K in November, $89K in December) it also seems likely that the January 2011 budget target would require further substantial growth in sales, and therefore would be even more challenging to meet.

UPDATE: I’m told that no more than a few hundred Genus phones have been sold to end users (and many of these are likely to have been purchased just for an initial test of the service), so it is inconceivable that the DIP covenants related to “Roam-In” revenues and subscribers could have been met at the end of December.

FURTHER UPDATE (2/11): On February 3, TerreStar filed the third and fourth DIP amendments, confirming that the the covenants related to Roam-In Revenues (Section 6.11) and Minimum Subscribers (Section 6.12) had not been met at the end of December 2010 or January 2011.

The next question is where TerreStar goes from here with the Genus phone. Will it be able to reach agreement with suppliers such as Elektrobit to keep supporting the phone (especially when Elektrobit is owed a substantial sum of money by TerreStar)? Would any breach of the DIP conditions simply be waived, and decisions on the future of the Genus phone postponed until after the company emerges from bankruptcy? With all the uncertainty about what will happen on MSS-ATC spectrum, that would seem to be logical. However, the apparent lack of appeal for this supposedly game-changing phone also highlights why LightSquared is so keen to be granted permission for its partners to offer terrestrial-only services, and I would ultimately expect TerreStar to follow the same path.

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