Q3 2019 Earnings Call
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Okay, and the converts over to speaker today, Mr. will Davis, Vice President Investor Relations. Sir. Please go ahead.
Thank you and good morning, everyone. Welcome to go those third quarter 2019 earnings Conference call. Joining me today to talk about our results are hopefully Thorne, president CEO and very Rowan.
<unk>, Vice President and CFO .
Where we get started I would like to take this opportunity to remind you. The during the course of this call. We may make forward looking statements regarding future events in the future financial performance as a company. We caution you to consider the risk factors.
Could cause actual results to differ materially from those in the forward looking statements on this conference call.
These risk factors are described in our press release filed this morning.
More fully detailed under the caption risk factors.
In our annual report on Form 10-K .
In 10-Q, and other documents, we filed with the FCC.
Addition, police note that the date of this conference call is November 7th 2019, any forward looking statements that we make today are based on assumptions as of the state.
We undertake no obligation to update these statements.
The result of new information or future events.
During the call, we will present, both GAAP and non-GAAP financial measures.
Include a reconciliation and explanation of adjustments in other considerations of our non-GAAP measures to the most comparable GAAP measures in our third quarter earnings press release. This call's being broadcast on the Internet in available in the Investor Relations section of Gogos website at <unk> Dot Gogo Eric.
Dot com.
The earnings press release is also available on the website.
After management comments, we will post acute when they session.
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It's now my great pleasure to turn the call over to hopefully.
Thanks Bill.
Good morning, and welcome to our Q3 2019 earnings call.
Please turn now it's a very strong quarter with adjusted EBITDA and free cash flow well above our expectations.
No as we predicted on our last call service revenue was down as result of the final American Airlines de installs and conversion from Turkey to the airline directed models.
So we're not happy about that decline in revenue.
It's worth noting that underlying growth has made up for a lot of that loss.
We achieved $158 million of service revenue Q3, this year, which is right about where service revenues stood according to the de installed program began in earnest in early 2018.
I'm also pleased that despite having an extra interest payment in the air we remain on target to improve free cash flow <unk> hundred million dollars over the prior year.
I'll leave the rest of the numbers to Barry.
Now I'll move on some of the operational aspects of the business.
And then I'll turn to strategy.
It goes without saying these are very exciting time to go though.
As we scale our operations in support of Delta Airlines desire to provide free Internet service to the passengers.
As we made great progress on our Dogo Fiveg product initiative.
And as we work with our satellite partners on new and exciting ways to serve the arrow I have seen market.
It's also exciting to see a nice bounce back or business Aviation Division.
As Oems made some nice catch up orders in the quarter.
The 80, yet be congestion cleared up in the aftermarket.
Perhaps most exciting today, we expect to sign a contract with a very prestigious EMEA airline.
I'll go to carry you went live TV and a significant portion of their widebody fleet.
Formal announcement will be forthcoming, but needless to say I'm happy to get Gogo back in the wouldn't call.
I'm very proud of my Gogo teammates for delivering such a great quarter, we've worked hard over the past year to improve our operations.
Execute on our strategy and achieve our financial goals I.
I think we're making great progress so thing.
Let me touch on strategy for a minute and then I'll turn to our three business segments to discuss some operational aspects of the corner.
Strategic fronts.
Today I'd like to talk about our network strategy.
We believe that the market for revenue from the connected aircraft is poised for accelerating growth airlines increasingly look at providing free I have seen a passengers.
The aviation Echo system, Luxfer cheaper and faster ways access operational data.
Our strategy is to take advantage of this explosion in demand by positioning ourselves as a provider of the most trusted broadband communications systems and the aviation Echo system.
Today, we serve that market with two network solutions in the K you satellite network in an air to ground network.
The satellite World, we pursue an open architecture asset light operating model.
Today, we work with 11 satellite providers and use 33 satellites to create and manage seamless near global network.
Delaware Bandic not today, we operate in the K you band because there are hundreds of K. you sound like.
We can layer capacity words needed.
Scale with demand grows.
We can provide more redundancy that close to K constellations.
I wanted to highlight the importance of redundancy for just stuck.
The last eight months three important sound like the fails or orbit around launch.
With the loss of enough that 20 Ninee. This year K. you supply Conus is tight.
The K. you service providers have still been able to serve their customers by utilizing other can't you satellites.
In contrast, if they were on a three sound like close gay system the networks.
For one third of the World would be dead did airline customers for an extended period of time.
Sounds like worlds going through a tremendous change amount of change.
Asset light model gives us the flexibility to harness that changed to do what is best for our customers.
We see the cost of satellites coming way down as manufacturers apply assembly line techniques to satellite manufacturing and innovation in the watch sector drives down watch costs.
Enable satellite operators get more bang for their Capex box lowered the unit price they charge service providers like go though.
New software defined payloads improved capacity utilization built for operators and for service providers like Gogo further driving down our unit costs.
I had been a yard meal constellations should give us the ability to drive down late.
Proved the user experience in our customers aircraft and provide truly global coverage.
Finally, we've always said that we were bad agnostic, but the arrival of more open K capacity, we're getting the chance to prove that.
And we've actually started pitching regional K solutions, where appropriate but more to say on that in the future.
Our satellite partners or talk to us about all these opportunities because we're a very attractive partner.
I have seen the fastest growing market segment for satellite operators and we're the largest player in the eyes. These space. If you want to play in this segment you want to go go as a partner.
Given all that change we wanted to be nimble take advantage of the best of what our sound like partners have to offer to deliver the best experience for the dollar our airline business jet owners.
Now, let me turn indoor air to ground network.
Starting more than 25 years ago, Gogo partnered air to ground network for aviation.
Today, our AG Fourg networks imports more than 5500 business aircraft at more than 1500 commercial aircraft.
Hi, competitive advantages and they TG, our proprietary for megahertz of spectrum, our deep knowledge of how to build 80 GE networks in our portfolio of intellectual property.
We've built three eight TG networks and now now building our fourth Gogo Fiveg.
We just announced or three strategic partners and making the new network come to life. Just go air span networks and first RF for.
All leading U.S. based providers of wireless network technology.
Building on network on Fiveg standards, and be able to deliver higher throughput and lower latency for a better passenger experience then potential competitive offerings.
Well also be bonding our four megahertz of spectrum. The 60 megahertz of unlicensed spectrum to provide more bandwidth in our classic ATP products without sacrificing the resiliency that license spectrum provides.
We're starting to talk about Fiveg airlines for regional fleets and even some mainline fleet.
And we're talking to business aviation owners operators of dealers about fiveg for their business aircraft and so far but getting a very positive response.
We remain on track to deliver this product in 2021.
We're very excited about the value of could create for our company and our partners.
Now, let me turn back to the quarter.
As I said earlier, we had strong results. So we want to be cautious about Q4.
The American de installs in 80 conversion will continue to be a drag.
On revenue versus prior year.
Satellite expense will increase is more to K aircraft come online.
Usage grows as we ramp in anticipation of significantly more demand in 2020.
And we expect incur increased investments in key programs like line fit and Gogo Fiveg.
Some of these headwinds and others will persist into 2020, Barry will discuss those in his comments.
As far as segment results, let me start the star of the quarter RPH Division.
Before I, even get into the operational metrics I want to talk about the National business Aviation Association show I attended in Las Vegas, two weeks ago.
We announced or five de partners, we had a great panel discussion in our booth was packed all week.
It's a real pleasure to talk to our BA customers. They love our products, whether they have advanced or the classic products and they have our service, which is testimony to our great business aviation team.
Be achieved record record revenue up 11% over prior year record segment profit record aircraft online for the quarter.
Shipment revenue significantly outperformed expectations due to adopt sales in both the OEM and aftermarket channels.
Oh I am sales were driven by some nice catch up orders for about five an aftermarket sales improved as some of the 80 SB congestion began to subside, it's a large dealers.
We still expect to see some made yet be related drag on aftermarket sales for the second quarter of next year, but it's nice to see the logjam logjam start to break.
As a result of these trends.
We're raising our previously revised 2019 revenue guidance for BA to the high end of the 290 to 300 million dollar range, we shared last quarter.
I'd be a division continued to exercise strong expense control in the quarter is expected to hit their cash flow target for the year. Despite the weak sales it experienced in the first half.
Be a T. G installed plane count grew to 5527 up 500 aircraft 508 aircraft for 10% from Q3 2018.
<unk> decreased by 65 aircraft from Q2 this year.
Even more encouraging we shipped 293 80 GE units in the quarter.
Almost as high as the record 296 CTG units shipped in Q3 last year.
Service, our boat for AG units grew to $3087 per month up 2.6% from $3008 per month in Q3 2018.
We're now up to seven Oems it up kind of off into line fit and expect to more 2020.
Bodes well for future equipment sales.
We think our visits aviation division is a great business. It addresses a large underpenetrated market has an exciting new product pipeline. It provides a resilient recurring service revenue stream and it exhibits nice operating leverage because at the low fixed cost nature of our proprietary TG network.
Now, let me make a few comments and the combined D.A. segments.
Dive into the rest of world in North American segments separately.
I'll start with some good news, which is that our two k. you product is operating well with record net promoter scores at customers to provide us with NPS numbers.
MPS scores of also improved nicely far ATP network as traffic has been offloaded to our satellite network and in fact at one customer.
Our 80 G.N.P.S. beat some of our competitors satellite NPS scores.
We're also proud that Delta Airlines, who exclusively uses gogo for why find their aircraft won the prestigious apex passenger choice award for best wide body voted on by 1.4 million passengers, beating jet blue or what the year before that supplied by a competitor.
Also on the positive side, we continue to make progress in supporting Delta Airlines and their announced intention to bring free Wi Fi to their passenger base.
We're very excited about this endeavor. However, we'll leave it to delta to announce their plans for what and when they plan to rollout.
Turning to see a combined revenue as we discussed in our Q2 call Q3 was the first quarter suffer the full impact of the American Airlines de installs and transition from the turnkey model to the airline directive model.
In total these changes created a 100 million dollar hole in our service revenue from one to be installed started early 2018, which we've been able to largely offset by growth at our other airline and in our business Aviation Division.
Cost remained in check and see a this quarter and we got some benefit from positive equipment margin as well.
We now expect growth in aircraft online at our combined CA segments router planning horizon.
Feel that the CIA segments were returned to revenue growth in 2020.
The ended the quarter, we had almost 1300 to care you aircraft online net increase of 73 with another 845 backlog.
62% about two can you backlog is in rest of world, which represents great new revenue potential.
38% is in North America, which are mostly a TG upgrades and represent an opportunity for increased DARPA as they moved faster to get you service.
Take rates grew slightly in C.I. M&A over prior year and were down slightly in CA rest of world due to new fleet installations.
Combined profits of the CIA segments was slightly negative, but well ahead of expectations and well ahead of prior year.
Overall, we expect a lot of activation activity in Q4, but still expect to be at the lowest and of our guidance of 400 to form a 400 disorder and 75 installs for the year.
As some airlines have held back claims can make up for mismatched deliveries.
As others have delayed for internal scheduling the reasons and sovereigns resolve the government shutdown earlier in the year.
As far as Max is generally we've installed seven for the year and in total we have a backlog of 36, which includes our first line fit Boeing aircraft scheduled for the fourth quarter. This year.
Obviously, that's scheduled could change given the fluid Mac situation.
But when it does occur it will be our first major OEM line fit installation.
Watershed moment for Gogo.
We had one first of type induction in Q3, the Cathay Pacific Athree hundred 33 huh.
In summary for the combined CA segments, we're excited about the potential barsi a business.
Global wireless usage trends are solid and improving and will drive demand for free Wi Fi and aircraft, which will spur demand for our products and services.
And the total addressable market as large and relatively untapped, it's only about 35% of aircraft globally installed the broadband I asked the product today.
We believe there will be 18000 newer retrofit aircrafts installed with broadband over the next decade that we can win our fair share of that addressable market.
Now I'll get the little detail on the commercial Aviation North America, and then on commercial aviation rest of World.
We had 69 gross additions and see a and eight for the quarter down a little from 74 prior year down from 92 Q2.
Net additions were a negative 21 for the quarter as many of the gross installs were 80 upgrade some airlines retired older eight TG aircraft.
We expect a significant uptick in installs for Q4, most of which will be turnkey ATP upgrades.
I should note that as we look at Q4, we expect to take a small revenue hit from one third party pair is experiencing financial difficulties.
In rest of World, obviously, our new airline contract is our biggest news, but more generally we had a good quarter.
We signed a restructured contract is one of our Latin American partners that will lower our equipment subsidies improved gogo cash flow over the next few years.
As for installs, but the seasonally slow quarter 31, gross additions versus 50 for Q2, and one d. and stuff.
We expect to significantly increase in row installations for Q4, most of which will be under the airline directed models and we should approach 200 net additions for the year.
We plan to drive our ROE segment to profitability over the next few years by installing our backlog ramping ARPA, reducing cost is life. It gets completed utilizing our satcom capacity more efficiently and driving down Satcom unit costs.
So let me conclude my comments by saying that we had a strong first three quarters of the year, though we're not all the way out in the works we've made great progress.
With that that'd be turn it over the barrier to do the numbers.
Thanks So.
Let's jump right in beginning with a summary of our third quarter results.
Gogo delivered another great quarter financial performance, adjusted EBITDA and cash flow, both substantially exceeding our expectations.
This was the third quarter in a row that adjusted EBITDA exceeded $35 million.
This quarter's outperformance was driven by a rebound in business aviation and commercialization expenses remaining below budget.
On a sequential basis the equipment revenue was up 58% and segment profit was up $6 million.
She is up expenses have continued to run below plan for both satcom and overall operating expenses.
From January through September we have delivered $111 million, an adjusted EBITDA exceeding 2018 full year performance of 71 million by over 50%.
We are raising our adjusted EBITDA guidance as we have done in each of the last five quarters. This time to $120 million to $130 million for the full year 2019.
At the midpoint this represents 76% year over year increase and adjusted EBITDA.
And it just additions to the strong adjusted EBITDA performance, we have dramatically reduced our casper.
During the quarter, we achieved record positive free cash flow of approximately $34 million.
During the first three quarters of 2018.
Were $216 million and cash versus just six not just $3 million for the comparable period this year.
For the second quarter in a row Unlevered free cash flow was about $30 million at a positive 33 million.
We continue to project positive Unlevered free cash flow for the full year 29 team.
This improved cash flow performance is the result of the very strong adjusted EBITDA achieved during the first three quarters of your.
Lower airborne equipment investments.
And improvements in networking capital.
We are achieving the aggressive targets, we set for reduced inventory purchases and improving accounts receivable during the year.
As we've guided since the beginning of year, we're on target to improved free cash flow this year, but at least $100 million over 2018.
This is particularly important achievement considering that our net cash interest expense for the year, what we $39 million higher in 2019 versus 2018.
This year's higher interest expense is primarily due to making three interest payments on our senior secured debt during the year due to the timing of our refinancing.
We of course, very pleased with the adjusted EBITDA and free cash flow poor performance, we've been able to achieve for the first three quarters I'm 29 team.
However, we do want to make sure that we properly set expectations for the balance of the year.
And that spirit I'll offer some perspective on how we deal with both adjusted EBITDA and free cash flow developing for the fourth quarter.
First regarding adjusted EBITDA.
Well Satcom expense is still running well below plan. We do expect these expenses to increase again in the fourth quarter as we entered into contracts to serve the increasing demand from our customers.
In addition, some CA expenses were delayed from this quarter, we still expect incur in future periods.
As you will note a raised 2019 adjusted EBITDA guidance implies fourth quarter adjusted EBITDA of $19 million at the high end of the range.
This compares to the over 35 million, we achieved at each of the first three quarters.
As we look at free cash flow for the fourth quarter. There are some note outflows that will reduce it from this quarter's record level.
Given that free cash flow as improved by over $200 million for the first three quarters. Let me highlight the primary reason is expected to come in closer to 100 million dollar improvement for the year.
First we have $54 million, an interest payments due during the fourth quarter and had none in the third quarter.
Secondly, we expect working capital to be a use of cash in the fourth quarter due to some anticipated swings and the timing of working capital.
Before we turn to our operational performance, let me highlight a couple of additional points regarding our balance sheet.
We did put the asset backed loan facility in place as we indicated on her last earnings call.
30 million dollar facility carries an interest rate of LIBOR, plus 2% translating to approximately 4% at today's rates.
While these funds are now available to us we have not drawn on the facility.
We're also pleased with the debt instruments within our capital structure are performing well.
Both the senior secured notes and the 6% convertible notes are trending well above par.
I'll now turn to a discussion of our third quarter operating results starting at the consolidated level.
Consolidated revenue was $201 billion down 7% from a year ago, reflecting planned reduction in revenue from American Airlines.
Consolidated service revenue was $158 million for the quarter essentially flat from year ago.
We expect revenue to increase in 2020, as we add new aircraft and see a and with an outlook for resumed growth and be a total revenue.
Our bottom line performance has benefited from disciplined cost management across both C and b.
For the first nine months of this year Department and Satcom expenses are approximately $20 million below our internal budget on a combined basis.
As we will discuss some of this expense benefit is timing related.
Well there is more we can do to continue driving operational and financial discipline and the company. It has improved substantially during the past year.
Now, let's move to a discussion of the business segments, starting with business aviation.
We're very pleased to see it would be a business rebound in the third quarter.
Total revenue for being increased to $81 million up 11% from the third quarter 2018, as both service and equipment revenue grew during this quarter.
Service revenue increased to 55 million up 12% from the prior year period.
This was primarily driven by 10% increase in EPG aircraft online and 5527, we ended the quarter.
Monthly service revenue for HPG aircraft online increased to $3087 up nearly 3% from $3008 in the prior year period.
The weakening trends in equipment revenue, we saw during the first half of year tied to the Ats people they are starting to reverse.
The equipment revenue increased 58% sequentially on the strength of our Premier event L. five product line.
We are seeing Oems accelerate their purchases ahead of plan to airframe sales and dealers are again building inventory.
Equipment revenue for this quarter Max the all time high $26 million achieved in the second quarter 2018.
During the highly successful event product rollout.
Driven by this growth in equipment revenue and an attractive product mix.
Equipment margins increased from 28% and the second quarter of this year to 43% this quarter.
This is back in line would be a historical equipment margin.
Now.
Offered a $37 million was up sequentially by 6 million or 18%, primarily driven by the growth in revenue.
Based on these strong operating results segment profit margin grew to 45.4% during the quarter up from 43.9% sequentially.
Now I'll turn to a discussion of our commercial aviation Division, starting with CA, North America and rest of world on a combined basis.
It's worth highlighting three developments with four separate airlines, which influenced seasoned result, this quarter and going forward.
First of the completion of the American Airlines, the installations and the full impact of the airline switched to the airline directed model.
This is meaningfully reduced our revenues and associated profitability as I've mentioned and we'll make for a difficult comparison through the second quarter I'm 2020.
Second is an example successful renegotiation of the contract with the Latin American care I joke also described.
This represents a significant improvement in the five year NPV of the contract.
And is a great validation of one of the key objectives, we established as part of our integrated business plan.
Third we sit on our February earnings call that we expected to airlines to switch back from an airline direct business model for the turnkey business model during 2019.
The first one of these occurred in the first quarter and the second occurred in the third quarter.
The headlines for our commercial aviation business in 2019 are that even as he has endured some significant headwinds service revenue for the first nine months is up almost 3% over the same period last year and she is bottom line has performed well ahead of expectation.
Due to strong cost controls and the timing of expenses.
For the first three quarters of last year see segment profit was negative $52 million.
For the first three quarters of this year. It is a positive $10 million, including a modest loss in less than $2 million this quarter.
Importantly, the 62 million dollar segment profit improvement also reflects a considerable narrowing of the year to date losses and see a room.
The strong see segment profit was largely due to satcom expenses under running plan and the reduction and other operating expenses we targeted.
We anticipate that our satcom expense will come in more than $15 million below our 2019 budget.
However, we do expect satcom expenses to increase again on an absolute basis in the fourth quarter and next year to meet demand created by growing passenger usage.
As you'll recall through our integrated business planning process, we identified $75 million in annual savings and see a department spend excluding satcom expense.
When the time, we announced that plan in mid 2018, and the end of 2020.
On our last earnings call. We said, we expect it to achieve approximately $45 million of those savings or 60% of the target this year.
We now expect to achieve approximately $50 million or two thirds of that reduction this year.
However, it is also important to note that some of this is due to deferred expenses, which we expect to incur in future periods.
See a 62 million dollar improvement and year to date segment profit over the previous year has clearly been a major contributor to our dramatically improving free cash flow performance. This year.
In parallel we've also made significant strides in working capital management.
Most of the castle improvement from working capital has come through our planned slowing of inventory purchases and improving accounts receivable.
Now I'll turn to a discussion of the operating results for commercial Aviation North America.
Total revenue for CNH decreased to $84 million in the third quarter down 22% from a third quarter 2018, reflecting anticipated declines in both service and equipment revenue.
Service revenue was approximately $80 million down 14% from a third quarter 2018, primarily due to the impact of American Airlines.
Excluding this airline service revenue was up 7% over the prior year.
We continue to expect revenue growth resumed foresee a candidate in 2020.
Equipment revenue declined 76% to $3.7 million as compared with $15 million for the prior year period.
This decline was due to lower too can you installations and a shift in mix from airline directed to turnkey installations.
As I've described we expect total two k. you installations to increase meaningfully in the fourth quarter on a sequential basis.
Total take rate for cdna through year over year to 12.7% when excluding American airlines that ARPA was up 3% year over year to $132000.
Largely driven by expenses coming in well below plan CA in a contributed about $42 million of the over 60 million dollar improvement and see is combined segment profit for the first nine months of this year.
Now, let's turn to yeah are definitely also delivered a strong third quarter.
See road total revenues was approximately $36 million up 1% from year ago.
Service revenue increased to 22.6 million up 28% from a third quarter 2018, as we brought additional aircraft online.
Equipment revenue decreased to $13.1 million down from 17.6 million in the third quarter 2018.
Lower number of installs under the airline directed model.
As expected rotate great fun ARPA, both decreased over the year ago quarter due to the significant growth in new aircraft fleets coming online.
As we described on previous calls both the ARPA and take rates are substantially higher for existing airlines as a new aircraft leads mature.
Aircraft from New Airlines represented 49% of total R.W. aircraft online at the end of the quarter up from 30% a year ago.
ROE aircraft online increased to 721, a 41% from 513 as of September Thirtyth 2018.
We still have a healthy backlog of over 500 aircraft to be installed.
We're very pleased to see the losses narrowing for C.A.R.W. segment.
Segment loss and see a row of $13.7 million improved 40% over the prior year period, driven by higher service revenue continuing improvement in satcom utilization.
And lower operating expenses.
Through the first three quarters of this year, we reduced roll off in this by nearly 30% from negative $70 million in 2018 to make it a $50 million for the comparable nine month period. This year.
I'll now turn to a discussion of our 2019 guidance, which is summarized as follows.
Total consolidated revenue in the range of 800 million to 850 million is unchanged.
We expect seeing any revenue to be at the high end of the previously guided range of $355 million to $380 million with approximately 5% from equipment revenue.
No change from prior guidance.
We expect see a real revenue to be at the high end at the previously guided range of $135 million to $150 million with approximately 40% coming from equipment revenue.
No change from prior guidance.
We now expect the a revenues to be at the high end of the previously revised range of $290 million to $300 million.
We're raising our adjusted EBITDA guidance to a range of 120 $230 million an increase from our prior guidance of 105 to 115 million.
As a reminder, the adjusted EBITDA guidance provided on our February 2019 call was 75 to 95 million.
We expect the increase in two can you aircraft online to be at the low end of the previously guided range of 400 to 475.
But we won't be discussing 2020 guidance on this call we thought it might be helpful to offer some perspective on the puts and takes as we look forward next year.
We're very positive about the progress we've made in the last 12 month.
Evidenced by this year's strong financial performance.
But we also want investors to maintain our balance perspective, as we continue to build on Gogos achievements.
And assessing our 2019 performance reporting to recognize that year to date adjusted EBITDA has benefited from about $9 million of nonrecurring items.
Now as we look to 2020.
Then be a we'll be making meaningful investments in our Fiveg network in preparation for its commercial rollout plan for 2021.
These plans, our new but are worth reiterating now that we've named our five to your vendors.
Yeah revenue rebounded well in this quarter, but we're monitoring the potential impact on longer term service revenue from a temporary delays and equipment sales due to 80 SP.
Let's see a we've effectively we will have effectively lapped the issues with American airlines by the third quarter of 2020, including the be installs and the airline completing its shifts to the airline direct business model.
As I said previously 29 team is also benefiting from the deferral some operating expenses into future periods and some additional program spending will occur in 2020.
Finally regarding cash flow, we're extremely pleased with the progress we've made in 2019.
But do bear in mind puppies results reflect a meaningful portion of the Cashel improvements we have targeted to come from working capital, which are largely nonrecurring.
As I conclude my prepared remarks, I want to join Oh in thanking our tremendously committed employees for their contribution to our strong financial results.
I also want to add my thanks to our investors.
Operator, we're now ready for our first.
Thank you.
As a reminder to ask a question being depressed star one on your telephone to withdraw your question. Please press the pound Keith.
Please standby, while the Kampala Kenny roster.
Our first question comes from Philip Cusick Jpmorgan. Your line is open.
Hey, guys too I.
I guess first congratulations on the deal to be signed today can you give us okay. An idea of the scale of that contract and what type of usage the customer divisions, maybe what kind of competition did you see on that.
And then there you were just going through some of the issues in jumping off from 2019.
EBITDA and free cash flow into 2020, you know not to asking for guidance yet for 2020, but but maybe if you can give us some of the net impacts on on both of those numbers that would be helpful. Thank you.
Yeah, Phil or over the first I I.
I don't want to get in front of the Airways.
Announcement, so I don't want go too far, but I'll say, the it's a global broke structure a wide body jets.
We are oh, the competition, where other IC players that can offer global coverage usual suspects. There I think you know they are impressed with the quality of two k. you they fluid a lot.
Other airlines and.
It's a I would say it's an airline is extremely focused on quality of service. So it's very rewarding to win that deal.
It's a book to K, you as well as our IP TV product.
That's great.
And fill on your question about about 2020.
Thanks for that pressing Hester given guidance on this call as you know, we do that off on a quarter clinical recall and we're still in the midst of budgeting for next year, but but here are some some thing to think about so this year. There is that 9 million dollar onetime benefit adjusted EBITDA.
In 2019.
As we look the next year the IBP savings are coming in ahead of plan.
We said coming into the here, we expect about half of those are little more to be realized half of the 75 million this year.
And now it is more like two thirds of the 50 million. So that that's certainly helps I would say on I'd be really most of the operational disciplines and process improvements are happening is plan. There is one project running behind plan.
That will extend throughout 2020, I'm, having to do with driving efficiency in production operations.
And we will.
Look to be increasing some expenses for some important investment area, so fiveg being a major one.
BA and that's on the order on the Opex side, it's kind of $10 million to $15 million and we're also be doing things like adding to our really talented satellites to meet the significant demand and kind of maybe some programs also that we went into mass and take advantage of selling new opportunities things like.
Line fit and so on so hopefully that gives you a little more color on on how do we see 2020 unfolding.
Thank you our next question.
Thank you.
Question comes from Lance Vitanza of Cowen Your line is open.
Hi, guys. Thanks for taking the questions nice job on the quarter.
On the business Aviation segment, you, obviously talked a lot about you know kind of rolling past the S.A. ats be installation mandates.
Those were a big deal in second quarter.
I'm guessing that you didn't really see any impact of that in the third quarter, given the near record volume of shipments but.
Is that true or or was there, perhaps even some lingering impact in the beginning of a quarter, maybe and I guess im just trying to think about what if anything that suggests swore the next few quarters.
Yeah, I know, there's still a impact you know talking to the dealers.
They have the big dealers in particular have.
Handled all the larger aircraft at this point there are more I'd say lower value holes that are still getting 80 SB they moved.
A lot of that out to what they call satellite facilities, so more remote area airports, where they have hangers et cetera, and they've been able to open up shop floor space in their major facilities.
And get back to sell and you know I FC and other products, which are frankly more profitable done than 80 SBS.
That so that said, there's still some pressure there and I think we expect to see.
80, yet be installs continue through the first half of next year I think the dealers expect that so I don't think lever fully out of the woods on it but it was nice to.
See a pickup in those orders remember those aren't all activations those are units at our are shipped in the VA business, we sell off and then we booked revenue.
Got it.
We shifted the OEM or the dealer day that you know actually installed though some of those will go on the shelf and be installed over time.
Just to add to Oaks, what about the mix on OEM versus aftermarket two lots of an OEM has particularly picked up and so where you see the impact of video views on that aftermarket side. So that's where we're still continue to see that during the course here.
Great and then if I could just ask a follow up again in the BA segment, but the monthly revenue for aircraft online on the AG side.
The last several quarters has been sort of stuck in the low single digit range is that just sort of what we shouldn't expect going forward or do you see an opportunity for re acceleration either you know under the current events sell five program or perhaps you know when you have eventually rolled out fiveg systems.
Sorry are you asked about ARPU and 80 G part, yes, yeah.
There's a little bit of downward pressure there because the people had unlimited lot of people are buying unlimited plans.
What about Spurs rolled out and of course.
You know there's when they go over certain.
Yes, halt there wouldnt be getting charge more et cetera, et cetera, so they've gone to more managed plants I guess and Ah. So that's one of them down or pressure is only down but you still see a lot of people upgrading plant as well we don't have fiveg.
I wouldn't want to get out and expect they too much about what our fiveg pricing for plans will be we have.
Decided that.
Okay. Thanks, guys.
Thanks Lance.
Thank you. Our next question comes from Scott Fidel of Roth Capital. Your line is open.
Hi, Good morning, Thanks for taking my questions are nice nice job on the quarter guys.
Just a real quick question on on Satcom capacity I know you guys had been working hard to go back renegotiate expand the footprint to give you guys from some diversity.
And reliability and back up in terms of satellite failures, but can you help us understand how some of those contract renegotiations get feathered into 'em your satcom costs, particularly on the international front, where utilization is a lot lower just given the number of aircraft or that are currently live and if you could extrapolate that.
Now with the new.
EMEA customer and 500 aircraft in backlog does that get you to a breakeven results in international once they're fully deployed thanks.
Well, the let's start with that.
The renewals I mean, most about when we're renewing now.
We are usually about first of all not usually been doing on the same sound like we're committed to a new satellite.
Like we did but utilize that tend be even show up as announced I think last week.
And those new satellites are at a much lower unit cost than.
The contract that are rolling off so a dramatically lower so.
Those are improving our economics in rest of world not that's gonna be one of the major drivers towards profitability.
Net in that division.
I'm sorry, the second part of your question on a on capacity was.
Well, Okay, just kind of extrapolating your backlog out.
The rest of World with 500 aircraft plus the new deal that's announced today that you start to get some better utilization with that footprint and better cost does that get you to breakeven just deploying against what you've got visibility and under contract to now in international markets. Thanks.
Yes got it and as we've said I note as up kind of reiterated on this call, but you know the drivers remain a what they've been getting those installed increase in Europe , or what kind of fleets stances is reducing some of the OEM costs.
Coming down overtime as we get those programs behind this and so on clearly that the increased demand being driven.
Forward satellite capacity helps worldwide. So just to underscore Oaks point on that.
And I would also say that just orderly we're announcing today certainly helps and you also saw the announcement that we made up about butyl fab four capacity over that region. So that also helps as per contract come off and were able to deploy that tend to be satellite at attractive pricing. So so I wouldn't want to say.
Specifically about what that looks like for R.W. out lots and to quit clearly this helps and it's part of the strategy to add airlines in those regions, where we have excess capacity and can drive it down and continue to drive the cost structure, though.
Great. Thank you nice quarter.
Thank you not.
Thank you. Our next question comes from Rick Prentiss Raymond James Your line is open.
Hi, good morning, guys.
When it.
A couple of questions, if I could or would follow up on fulfilled questions on in particular to the Satcon reflect wrote the numbers don't dress up very that you were giving.
Sounds like Satcom, now 20 million below plan year to date, but that for the year. It might be 15 million is that kind of the timing I mean, we're getting out or just increased demand.
Yes, Rick just to clarify that $28 million a year to date was the amount that we are under four satcom as well as the department operating expenses.
And then for the year, we expect satcom to be a $15 million below that the budget and just as a reminder, it's growing of course on an absolute basis from second quarter agreement in third quarter will grow again in fourth quarter as demand grows, but it's still even with that growth in absolute terms, it's running below plan.
And talked about.
Sure and as far as versus plan is that your internal plan or is that kind of the plan you would've been communicated this raise it doing like significantly better than the internal plan as well.
No that's versus the internal class so hopefully that so when we talk about the EBITDA exceeding expectations certainly that's true versus the street, but it's also true based on our internal budget because of the these expenses coming in below plan and we talked about that on the last call that part of that is due to the gray.
Network by the engineering teams as we put that policy management in place and as we introduce new network elements like modems that helps.
The overall usage to deliver at the same user experience. So so part of that has been the benefit of that kind of engineering work.
Okay. So they can the early prepared remarks oak you might imagine something about Oh revenue that in fourth quarter from a third party payer could didn't help us frame that kind of what kind of size, you're talking about which line item I would not.
Yeah, a couple of million and itself you know I tell you that stuff I pass which is.
It's pretty public how the financial troubles at the parent company then.
Okay last one from me, obviously, it's up to Delta that make the announcement, but what kind of timeframe should we be expecting updates from delta kind of on their view of unlimited why Pfizer sort of timeline you feel is poised to keep watching for no [laughter].
You know I go down to Delta pretty regularly and it's pretty well articulated to me that they prefer to make those announcements themselves.
So we're going to each of their wishes our job is to support them operationally and let them.
And let them manage the program commercial.
Sure and any final update on on the Max delays, how it affects your business looks like its slipping out into one Q, obviously, but just kind of help us update the thought of what Max delays are meeting to not just installs split that also service revenues.
Yeah, you know I, let Barry get to the service revenue component of it I don't know that we really calculated we don't have a lot of maxus I mean, we've got like I said, there's 36 and backlog, which includes the seven that have already been install so we'd have you know because only ARPA already from 36 more aircraft you can take an average ARPA number while the.
Hi times that that would kind of be the hit I think I'm sure Max planes, and then of course, there the planes that are not being given to us for installs.
It's kind of hard to quantify that exactly we actually try to this call because.
The airline start delaying things often there is a raft of reasons Max.
Delays might be one of them, they're not going to get it back so they need to keep some other playing in service and can't give it to us for Oh for that for two day install so we can't really quantify that but you know I would say you know there has been roughly.
Roughly 100 installs that got pushed out on up this year.
Max is probably.
20, 530% of those something like that yes, that's what we sort of roughly estimate and Rick the revenue impact is really very small yeah yeah.
Now for sure you know and obviously.
The Max is a big part of our future.
Once the on line fit on that that aircraft. That's up you know of aircraft will be nobody a lot of those manufactured presumably itll be you know one of the leading aircraft in the world in terms of unit counts. So my line fit on that is very important.
Great. Thanks for the answers.
Thanks, Rick.
Thank you. Our next question comes from Louie Dipalma of William Blair. Your line is open.
Good morning, Oak, Barry and well.
And with Lilly how are Ya.
Not bad I'm free cash flow generation has never really then associated with Gogo and appropriately you announced further measures to improve free cash flow on this earnings call on top of the this quarter's strong performance is the general plan.
To refinance your debt in June .
2021, I'm, assuming that you are still on independent company then.
Yes, let me take those one at a time, we first on the question about improvements to free cash flow.
Yeah, the drivers of that and then what increased EBITDA, the working capital management and the benefit from lower airborne equipment investment or what I tried to say is that we've had a really extraordinary improving free cash flow of $207 million in the first three quarters that.
That improvement over last year will decline.
As we exit the year for the reasons I mentioned, so we are [laughter] over $50 million interest payment in the fourth quarter and we also expect there to be a use of cash from working capital in the fourth quarter. So so that'll take the the improvement year over year in free cash flow performance, downpayment, where where it is.
Year to date, but still you know we feel very good about achieving at least 100 million dollar improvement year over year.
Regarding your question on refinancing, yes, as you know when we did the refinancing.
Of the $925 million, we purposefully.
Look at slightly took a lower terminal we could have taken a five year. So we did a five year term with a two year non call period and with the understanding that that would enable us to refinance sooner we expected at that time, it's still do for continuing improvements in the operations and that even though we got a good improvement in the interest.
During the last refinancing is set to continue to be able to be in a position to refinance the balance sheet at more and more attractive rate. So so in terms of the timing of the next big event is the maturity of the 6% convertible notes, which is in may of 2020 too.
So you know you could look to us getting something done with that more than a year in advance of that is the way. We think about that so that puts you into getting something done by.
The 2021.
Sounds good and now have an extended high level on industry question. Okay I.
I want you to address the topic of industry pricing power and negotiating leverage it seems that when airlines had your 80 de solution or no in flight Wi Fi solution that all it seems that the airlines had all of the pricing power and that manifested itself with how the airlines.
Especially your largest pout partners pressure you for heavy subsidies, which is why you accumulated over a billion dollar as if that now that satellite antenna across the industry are now on.
Over 8000 planes is there any evidence that airlines have switched.
Material number of planes from one satcom antenna to another and even if the sat com pollution is considered poor is there any evidence of switching you know from one sat com provider to another and so whereas that airline brutally exercise their pricing power.
Over Gogo for the past decade is it possible that all of the inflight connectivity service providers have some degree of pricing power now when negotiating contract amendment since they have a satcom antenna that seems very difficult to switch off.
That that was a rich and long question [laughter].
So I think in the early days, we would subsidized and 10 as heavily in order to two when airlines in anticipation <unk>. Those are usually turnkey deals where we then had the commercial right on the aircraft it to sell our product and too.
Bringing third party payers et cetera, you get.
Well, there's obviously switching more to an airline directed model, where the airlines want to control more of that especially the large airlines.
And so.
They are gone, they're getting probably more sensitive on the well they never had costs in the turnkey model, but they do have cost and airline directive because they're the ones that are paying us recession or getting a sponsor to pay us. So I think that there is less sensitivity on the.
Weapon side.
Most of our deals today are not heavily subsidized.
Sure well, maybe there's still some all bills abroad rate that was somewhat subsidized a little bit, but but there are new deals are pretty much all costs are very close to cost somebody equipment and then you know they're up I think the airlines are going more price sensitive on the dust and the especially as they look at going free.
So we are very focused on driving our unit costs down.
It costs down.
And.
With two K., you and other ways of delivering more efficient solutions to the airlines in our competitors can and Oh so.
I think that might answer your question on the renewals you know the renewals are these contracts are long contracts generally so there have been very.
Very few renewals, we didnt renew a American airlines earlier this year because there they have unusually short contract with us.
And we announced I think last quarter call.
And they were you know they were I'd say, a little bit less price sensitive than they've been in the past but.
But.
As I said I think good service pricing is gonna be where there's going to be competition going forward.
That makes sense there.
Thanks, guys.
Absolutely.
Thank you. Our next question comes from signing Flattery of Morgan Stanley . Your line is open.
Good morning, This isn't Landon park on for Simon I'm, just wondering if you could expand on any other conversations you're having with your partners around offering free Wi Fi.
And you also made some allusion to tighten this isn't the continental U.S. satellite supply market. So how should we think about your ability to being fully ramped your service offerings in North America, and when might when new supply might be coming online to support new services.
Yeah, I think that the.
I was alluding to is that Intelsat, 20, Ninee, which had a.
9.3.
Gig.
Okay, you on it but see uptake, but went out of service related to a fair amount of capacity out of the U.S market, but theres capacity for what we're trying to do.
Right now we are still negotiation with the number players. We've got eight eight different suppliers were working with a focus on getting the right pricing without minutes.
We're able to start a lot of competition between them. So we feel pretty good about that.
That's the capacity part of your question and what was it the other part of your question.
Any other conversations you're having with your partners around pretty wide farm.
So of course.
I mean, it's the conversation at every airline of course.
Some of them think it's great and some of them, but scared to death of it [laughter], but feel that they may have to react. If if you know what are the big majors goes three what are they going to do they're going to probably have to go free as well. So I think I think three well.
Well a lot sweep across the industry over the next say five years.
Different airlines will do that differently.
A lower cost airlines are not going to give away high quality, thats, probably but they're probably going to give away something.
And there will be everything in between so.
Yeah. It's it's a major every airline is talking about.
All right and one last one and see I Navy, our but was it was modestly down year over year, how should we be thinking about that as we move into 2020 and as we start to fully lap the American de installs.
Yeah. So as you look at this quarter versus last lend and did that this does it.
Reflect the impact of American Airlines, there for shifted the airline directed a model also in the second quarter did have a onetime benefit from the renegotiation of that contracts that we've talked about on the last call as you look at.
That quarter also excluding American airline.
They did include in the second quarter the revenue from the distressed customer at Oak described.
And so we're we're not accounting for that revenue until we see what happens with them and then there's some seasonality a bit in Q3.
We look forward you know to 2020, we will you'll see that impact of American Airlines and Uh Huh.
That will be with us or on a comparable basis through the second quarter, we see we see a arpus sort of flattish from the current level, but I would point out that we do as we said expect a revenue growth and see a and 2020 and then of course you know the biggest discontinuity in all of this.
<unk> is a major airline going for your other airlines going for you, which is going to completely changed the level of take rates and as we go forward and some of that that really has been would've been playing for since two can you got to established in the step and putting in a much better pipe to the plane. So so that's why that's such an exciting development for us.
Alright, Thank you very much.
Landon.
Thank you.
Last question comes from Greg give us of Northland Securities. Your line is open.
Good morning, guys. Thanks for taking my strings and congrats on the quarter.
I understand you didn't want to say too much here, but when should we expected to see the installs from the newly signed airline to begin and can you really give us a better sense of how large that fleet size is on a relative basis maybe.
And so I'll start to 2020.
And I think if I start talking about relative size geography people, Bobby vector to but yet on what the airline is I don't want to do that because last thing I want to do is picked them up and they were signed contract.
Fair enough.
And then secondly, it looks like you continue to have that dynamic of new airlines and rest of world that installed two k. you'd have roughly half the take rate levels that we see on seasoned aircraft.
So I guess I was just kind of wondering roughly how long does it take for those new airlines to reach those season take rate levels and is there any color you can provide on.
[noise], how those pay grade grow overtime and when we should start to see progress will take rates.
Start to improve again.
Yeah, So you're right Craig it it's a about half.
As we look at that so and it's for the reasons that you pointed out I mean, it actually varies a fair bit by airline I mean generally it's several years, but.
There has also been airlines, where it can happen faster so, particularly in a world where there's there's a an impetus to go free so so as airlines do that and now that that's out there and some airlines are doing that internationally that in some cases can accelerate it but generally we for our internal purposes Dude.
Modeled out to take several years and it's there are two parts about that matter. A one is that the full fleets really need to be installed because an airline is not going to promote the the white by surface until they can demonstrate the offered on every plane. So you don't want to get on a plane, where it doesn't have service and then secondly, even once.
The service or what's the planes or are fully installed in general and take some time for them to sort through exactly what their offerings going to be a and they tend to tweak that im leg into their ultimate wildfire.
Yeah, I mean, I would just add to that that that international wide body fleets that are fully installed tend to have our highest ARPA numbers.
Yeah, but that they are the hardest to install a if they're traveling international routes because they they're really utilize very heavily and getting them out of service to install takes more time, so some of our great European brands.
Hep, we've been installing for two years or so and you know we still got time to go in order to get to fully installed and up.
Again, it's really because those aircraft spend so much time in the air and it's hard to its harder than for the domestic fleet, where we can jump all those nose to tail. Just you know Bang and then [laughter] churn them up so it takes a little longer but the reward as much better well again.
Got it that's helpful. Thank you.
Thanks, Greg.
Thank you.
All right I would now like turn the conference back over to Mr. Oakley, the one for any closing remarks.
Thank you Dan. Thank you for attending our Q3 29 earnings got 2019 earnings Conference call I'd like to leave you with a few thoughts.
First we have a very strong cash flow generating business and BA.
Not only does it have a unique competitive advantage by virtue of our spectrum ownership, but it's also a relatively unpenetrated market and has ample runway for growth.
Second.
Slaby Asian rest of World is growing it's also an extremely large and unpenetrated market.
Our global to get you platform our progress in line fit in our strong backlog.
Well positioned to win our share of that attractive market.
Their commercial aviation North American revenues bottoming out as the impact of American Airlines the installs in their conversion to the airline directed models finally behind us.
We expect to start growing revenue again next year.
Fourth we strengthened our balance sheet, given ourselves strategic flexibility by pushing our senior notes out to 2024 and further strengthen our balance sheet this quarter by a closing our $30 million radio.
And finally by virtue of our industry, leading market share in our asset light operating model, we're well positioned to take advantage of the opportunities afforded us by the satellite industry and we look forward to demonstrating that to you in the quarters to come.
Thanks again for your time look forward to talk to you again next quarter.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Thank you.