Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly she's going to name a standby. Thank you for your patience.
[music].
Incorporated earnings Conference call at this time, all participants and I'll listen only mode. After the speaker presentation, there will be a question and answer session.
The question. During this session do you want me to press Star one on your telephone if you acquire any further assistance. Please press star Zero I would now like to turn the conference over to your Speaker today, well Davis Vice President of Investor Relations. Please go ahead Sir.
Thank you Sonia.
And good morning, everyone welcome to Gogos fourth quarter 2019 earnings Conference call. Joining me today to talk about our results are hopefully thorn, president and CEO and Barry Rowan Executive Vice President and CFO before 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 of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward looking statements on the conference call.
[music]. These risk factors are described in our press release filed this morning.
No more fully detailed under the caption risk factors in our annual report on form 10-K in 10-Q and other documents we filed the FCC.
In addition, please note that the date of this conference call. This March 13 2020.
Any forward looking statements that are we make today are based on assumptions as to the state.
We undertake no obligation to update these statements as a result, with new information or future events.
During this call will present, both GAAP and non-GAAP financial measures.
We included a reconciliation explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter earnings press release.
Scholes being broadcast on the Internet and available in the Investor Relations section of the Gogo a website at <unk> dot.
Well go air Dot Com.
The earnings press release is also available on the website.
After management comments, we'll hosted Kubernetes Fisher with the financial community only.
It is now my great pleasure to turn the call over to Oakley.
Thanks, Phil.
Good morning welcome.
We had a great fourth quarter and a great full year, but.
Talk down substantially in recent weeks.
But in certainty around the Corona virus and the Delta Airlines free Wi Fi program people are less interested in past performance.
And they are trying to understand future I know, so I'm just going to start with the car buyers today.
And then discuss in order.
The free program.
And then get back some of the fundamentals of our business.
The satellite industry, there are driving down our cost then discuss industry consolidation.
How we might fit into that consolidation.
I just got to change, we're making to our equity compensation plan.
And finally, I'll discuss the quarter in the year and provide high level thoughts about will be a very difficult to predict 2020.
So let me start with the news the day they run a virus.
As a very very very fast moving situation in our industry.
In fact, a great deal just changed in the last 48 hours.
Needless to say our primary concern is the health and safety of our employees and our customers.
Our next it started with the financial help Gogo.
As I discussed the impact of Corona virus are different.
Regions I think it'll be helpful to give you the regional breakout of our 2019 in their sales revenue do you have a frame of reference.
Roughly 73% Ryanair revenue from flight originating in North America.
19% originating in Asia, 5%, Europe, and 3% somewhere else.
In January and February we were on track for a great start to the year at both our business Aviation Division and our commercial Aviation Division.
In two weeks ago, we started to see a significant decline in Asia.
Our SBA division at U.S. Airlines cancel flights to the region and domestic travel in Japan declined significantly.
The first week of Mark we saw a decline in international travel more broadly.
Lord our total CIA and air sales by 6.7% versus trend for the prior to buying.
Yes, we were seeing a more pronounced decline in U.S. traffic.
Some of our larger commercial airline customers down as much as 15%.
We expect to further decline in European traffic with the flight Dan that goes into effect like.
They see a division, it's very hard pressed to predict exactly how this will play out different airlines are predicting a wide variety of different cancers.
We will obviously be negatively impacted the there like pay claims out of service, how badly where it will depend on what happens with load factors.
How long the travel or how long travels impacted by the buyers.
We also anticipate there could be a reduction in installations and equipment revenue is there like cut back on capital spending.
No perversely that could help as well those are older subsidized equipment deal.
We had $204 million of cash on hand adds up in the bank as of last night.
We're planning to a variety of scenarios and taking immediate steps to match our revenue declines with Cas expense reductions in order to preserve our liquidity.
Let's start today with the C O deferring it 2019 bonus until Gogo is it half your time.
Well provide more guidance on our Corona vivus actions events in our plans on unfold.
The only good news in all debt that we see no impact yet on her business aviation segment.
Some analysts believe that this could drive demand for private aviation in the future.
Now, let me turn to adult the free.
Said before we'll leave it at Delta announced their plans our role is to provide the operational support to make those plants have.
Under todays turnkey contract, we subsidize the installation of Delta Jeff.
We charged off this passengers for connectivity and then we paid delta or wealthy for access to their aircraft.
In a free novel that will completely changed and assuming we can determine delta would pay for equipment payoffs for passenger connectivity.
However, it's delta will now have to pay for connectivity Delta wants to make sure it is getting competitive pricing and competitive service levels.
And may want to move to multi supplier model for domestic mainline airline aircraft.
No we would not relish the idea of having a competitor join us at Delta, we coexists with competitors at most of the airlines, we serve and we compete very well on price and customer satisfaction those airlines.
We expect the man to go significantly without that goes free.
No no agreement has been reduced we and Delta expect us to grow our revenue from Delta in a post free environment. Even when you include the impact of some claims potentially moving to a competitor.
We further believe that deltas moved to free service will be a catalyst for other airlines to provide free service.
Thereby driving more demand for our products and more revenue and cash flow for Gogo.
Now I'm going to talk about some trends in our business because we believe we're going to survive Corona virus I think it's important that investors understand.
The underlying strategic issues and trends I industry. So let me start with developments in the satellite industry.
Let's start with a few comments and what we're seeing satcom pricing.
Impact that has an our CA rest of world segments future profitability.
As we replace expiring rest of world satellite contracts new contract.
On average, we're seeing a 67% decline or unit pricing.
If all of our current capacity in rest of world were priced at those levels. Today are our rest of world segment would break even on a segment profit basis, and 2021 and be profitable in 2022.
Of course, not all those contracts at those prices today, but two thirds of the current contract the rest of older expire. The next three years and we'll have the opportunity to replace them with much cheaper capacity.
Two other positive trends are non geosynchronous orbit satellites and dsos.
Which we expect to start coming online 2022.
The emerge and the Americans have managed services, which give us much more flexibility in terms of what we can provide our airline customers.
Let me start with wired, yes, those are important.
As we studied the most frustrating and that's it in flight connectivity to passengers. Many of them are a result, the high latency inherent geostationary satellite.
And dsos, such as Mediamiser orbit satellites, Neos and lower part of a satellite leos.
Much closer to or a packet from the teleport for the satellite to the aircraft travel a much shorter get them and thrive much faster than what the Geo satellite.
And our lab testing complex web pages downloaded more than three times faster with a meal satellite then with the Geo satellite.
This type of responsiveness does not only important for web pages, but also for cloud based applications like Microsoft 60, or VPN and activity for gaming for interconnected fat I M ATV and alike.
Very important for private passenger satisfaction in the future.
It's it's a number of airline cellulosic quality I see no. There number one driver of customer satisfaction, we believe I airlines will value low latency solutions.
We're working with potential Ngs, so partners on a variety of fronts.
Oh pursuing demonstrate that I've been talking to can you encana and work with Leo constellations hope to have an announcement in that regard shortly.
I should know that all of our competitors used traditional gimbal that kinda.
They wont work with Leo constellations, So airlines installing adequate well have to go through an expensive upgrade if they want the benefits of Leo low latency.
The other innovations around managed services many years ago, when we decided to expand into satellite based <unk> I see we had to either become a reseller of our competitors network or build our own network, what I'll call that network ownership model.
We chose to build our own in K you band spectrum at that time, because it was the only spectrum with enough global coverage capacity and redundancy and meet our global airline partners needs.
In the network ownership model, we must kept by capacity wherever our airline slot and we pay for it no matter how little we use it.
The new trend is it some satellite operators are developing enough of their own coverage. They can begin to offer us a managed service, where we buy buy that right instead of Oh.
This model has the benefit of reducing our fixed costs, increasing the first of all capacity, we can bring to airlines, improving our capacity utilization and enabling us to tailor solutions individual airlines need.
No we remain committed to supporting our current customers. Okay, you can activity.
We also see opportunity to reduce regional managed service create solution that will require very little capital investment upfront from us.
The part of my discussion event Dsos and managed services, it's just because of our asset light model and the open architecture flexibility we've been built into our solutions, we're able to quickly <unk> best of breed solutions provided by our partners and deliver them to our customers.
In contrast, our vertically integrated competitors have committed the next several years of capital investment.
Dan Geosolutions.
The hard time, Egmont augment and goes investment plan to compete with all the innovation our sound like partners are bringing to market.
Now, let me turn to some of the dynamics inside the <unk> the industry itself.
At go though.
We have two businesses business aviation and commercial aviation.
We believe our current enterprise value significantly underestimate the value of those two parts.
Our business Aviation segment is a solid franchise.
Produced solid growth in a relatively underpenetrated market.
This is strong recurring cash flows.
Proprietary technology and intellectual property.
Pelling product road map in a very strong position in a relatively price sensitive market.
Our commercial aviation segment also represents real value. It is leading share in a fast growing industry very attractive customer base.
The strong product road map.
Strong product integration engineering, a distribution capability.
Yes, you on the commercial aviation I see space.
There are too many competitors and nobody yet has enough scale to build a sustainable business for the long term.
We believe that some consolidation will occur the C.A. I asked the space.
Working hard to leverage our leading market position to make sure that our shareholders are among the beneficiaries of that consolidation.
In order to make the value of the parts of our business more evident.
The 10-K, we'll file the day broken out our corporate expenses from the B. I see a segment expenses. So investors can see the performance of our operating segment on a standalone basis.
Now I'd like to touch briefly on some changes to our stock based compensation that our compensation Committee has approved.
It's important to understand.
Gogo is most important asset arts employee.
We work in an industry that demands very specific knowledge and skills.
Our employee equity compensation plans were put in place years ago, No longer act as their attention vehicle we need.
84% of our stock options are more than 300% out of the money and more than 99% or at least 180% of the money.
Given the issues, we faced with Corona virus and other challenges I think it's time to bite the bullet and offer an option exchange to our employees that receive equity compensation.
We have a real retention tool and employees have a piece of paper with real value.
Exchange, which will be in the property has the added benefit of returning roughly 3 million shares into our employee onto that incentive plan pool.
Thereby reducing the need for us to come back to shareholders to replenish the pool in the near future.
I think this is very important because retaining our highly skilled employees will be very important are realizing the strategic value for go though that I discussed a moment ago.
Now, let me turn to the quarter every year.
As I mentioned.
We had a really solid quarter and a great year exceeded our revenue adjusted EBITDA and free cash flow expectations by wide margins.
That's the most important metrics, our first free cash flow, where we improve dramatically despite having an extra interest payment as a year.
Second Unlevered free cash flow, which improved from a very negative number to 2018 go very positive number 20, Nike demonstrating underlying earnings power of the business.
As always I'm very proud of my Gogo teammates for delivering such a great year, we've worked hard to improve our operations execute on our strategy and achieve our financial goals.
I think we're making great progress so thank you.
Our business Aviation Division had a really solid quarter with record revenue for both service and equipment and good cost control, which in turn delivered record segment profit.
Be a division added 140 to 80 de aircraft online on the quarter to reach just under 5700 at year end up 9% from prior year.
And achieve accelerating habit service revenue per aircraft throughout the year end up $3200 per unit.
For a 5.4 from prior year.
Shipments were straw, especially for the about Delphi product would shift 171 units in the quarter type or hires quarter ever.
Turning to our theory segments.
To add a few segments together, we crossed an important threshold with positive combined annual segment profit for the first time.
And our commercial aviation North America segment, we achieve quarter over quarter, both new aircraft online with a positive 20 for the quarter CA rest of world installed the growth 77 that 71 plane in the quarter, which was up over prior quarter flat to prior year.
Rose service revenue was flat prior quarter, because planes installed this quarter of yet to produce all the take rate.
But was up 21% over prior year, some planes and newer fleet began to mature.
Across the segments, we installed exactly 400 aircraft online, which was at the bottom of our guidance.
As a result, the Max rounding federal government shutdown in internal operating issues certain airlines.
We crossed the major product mix threshold in the quarter was 50% of all aircraft now a well see a aircraft now on satellite I see as opposed to 80 G. I see.
We also finished the quarter the strong two k. you backlog of nearly 950 aircraft as we picked up 150 aircraft new commitments from existing customers top up to 70 aircraft order from class.
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With that let me turn to 2010 20.
Needless to say so your considerable uncertainty due to the Corona virus.
So we're going to share what our guidance would have been without the corona virus, an update as the situation solidifies.
In order to managed growth expectations as it would've been I think it's important to remind you that over the course of 29 team. We highlighted approximately 35 million of nonrecurring revenue benefit, which equated to a benefit of 31 billion of nonrecurring adjusted EBITDA.
When you adjust for these items.
2019, adjusted EBITDA would have been roughly $150 million, so well ahead of guidance and prior year, but less than our reported adjusted EBITDA of 146 million.
Do you think about trajectory, we had 71 million and adjust EBITDA in 2018.
Excluding the nonrecurring revenue and adjusted EBITDA of 115 2019.
Our pre grown a virus project continued that trend in 2020.
The point of sharing what our 2020 plan would have been.
So the next Corona virus, we have a healthy business. It is now going to suffer a setback, but I believe we can fight our way through this and preserve gogos franchise value.
Well continue to serve our employees and customers well, we're going to focus on maintaining our liquidity.
Let me get through this pandemic I believe will be stronger than we were before.
With that let me turn it over to Barry for the numbers.
Thanks.
Good morning, everyone.
I'll start with an overview of our financial and operating performance and conclude with a summary of our approach to the way we're handling our 2020 outlook and the contracts or the current a virus outbreak.
Well go delivered another strong quarter Andy here.
Adjusted EBITDA in the mid $30 million range for the fourth quarter in a row.
Record annual segment profit for both BA and CA and a 163 million dollar improvement in free cash flow in 2019 as compared to 28 G.
2019, adjusted EBITDA of $146 million was more than doubled to 71 million achieved in 2018 and over 70% above the midpoint of the expectations, we sat coming into 29 gene.
As I've mentioned there were some nonrecurring benefits included in the 2019 results, but even considering those factors 29 gene represented a dramatic turnaround and Gogos financial performance.
In addition to the strong adjusted EBITDA performance, we reduced our cash burn during the year very substantially.
For the first time since going public seven years ago. The company achieved positive unlevered free cash flow on an annual basis and it was meaningful at $85 million.
The 163 million dollar improvement in free cash flow over 28, Jean was well ahead of the at least hundred million dollar improvement, we guided to coming into the year.
And this was despite $39 million more and interest payments in 29 gene due to the refinancing we completed in May.
This improved cash flow performance is the result of three factors lower investment in the airborne equipment.
Adjusted EBITDA coming in well ahead of plan.
And improvements in other working capital primarily accounts receivable.
We exceeded the aggressive targets, we set for reducing inventory purchases and improving accounts receivable during the year.
This pull forward some of the improved cash flow performance, we had previously expected to occur in 2020.
And enabled us to finish the year with a very strong cash balance of $170 million.
This additional liquidity is even more important given the uncertainties created by the current a virus outbreak.
Well, we're on the balance sheet, it's worth reiterating that a significant accomplishment during the year was a comprehensive refinancing we completed in may.
We're now in a very different situation than we were coming into 2019.
We pushed out 80% of our debt maturities the 2024.
Lowered the interest rate on our senior secured notes by two in five or 6%.
And added a $30 million ABL facility to provide some additional liquidity buffer.
Before turning to our operating performance, let me touch on the change in financial information discussed on this call and reflected in our earnings release and 10-K.
You'll see that we've excluded corporate cost from segment expenses in calculating segment profit.
This new reporting provides greater visibility into the specific performance of our operating divisions as well as corporate spending.
You'll also see that 2019 corporate cost of $33.4 million, excluding stock based compensation.
Were reduced by 17% from $40.3 million in 28 gene.
Of course, reducing these cost it was also a focus of our 28 gene integrated planning process.
I'll now turn to a discussion of our fourth quarter operating results beginning at the consolidated level.
Total revenue of 220 point $221.3 million increased 2% with service revenue growing 4% and equipment revenue declining by 5%.
BA equipment revenue was up 22% over the prior year period.
Well see A's equipment revenue declined from the prior year, primarily due to fewer aircraft installations under the airline directed model.
Adjusted EBITDA of $34.4 million for the quarter significantly surpassed internal and external expectations.
Resulting in 78% growth from Q4 28 gene.
This quarter's performance was driven by strong BA segment profit a $41.7 million up 17%.
And a 37% reduction in our Aro w. losses to $15.1 million.
Our bottom line performance has benefited from disciplined cost management across both see a and b.
Department and sat Com expenses were $34 million below our internal budget for the year as a whole well approximately $2 million these savings related to timing.
A tangible demonstration of the improved operational and financial discipline in the company achieved during the past year.
Let's now turn to a discussion of our business segments.
In summary, both BA and CA delivered excellent results for the year.
The overcame the 80 F.B. channel constraints of the first half of the year to achieve a record $144 million an annual segment profit.
With service revenue growing 13% year over year.
On a combined basis see an A.M.C.R.W. posted positive annual segment profit for the first time totaling $36 million, excluding corporate costs, and we're still modestly profitable when including these costs.
Now, let's review the be operating results in detail.
Be a had an outstanding fourth quarter.
Total revenue of $85.9 million grew 17% from the prior year period on the strength of both services and equipment.
Service revenue of 58.6 million grew 14% with 9% growth and 18 GE units online.
For the fourth quarter HPG average monthly service revenue grew 5% year over year up from a 1% increase in this metric during the first quarter of 29 gene over the first quarter of 28 gene.
This represents a re acceleration and the growth of the is unit economics as measured by average monthly service revenue.
It was largely driven by a higher mix of advanced products.
These equipment revenue came back strongly in the second half of year as OEM sales picked up and as the aftermarket channel began buying more product as previously constrained installation capacity due to the 80 SP began to relax.
Total events equipment shipments in the second half of the year.
Were up almost 60% from the levels in the first half of the year and L. five shipments more than doubled.
On the strength of the service and equipment revenue growth BA segment profit grew to a record $42 million in the fourth quarter.
Representing 49% segment profit margin very close to be a is all time high.
For the full year being achieved total revenue of $309 million up 6% wouldn't service revenue of 222 million.
It was an increase of 13%.
Equipment revenue was down 7% to $87 million as we manage through the ats be overhang and comparisons to very strong shipments in 2018, which was the first full year. After our advanced L. five L. Three product introduction.
This product line has been the most successful product launch and be a history of strong product launches and continues to be well received in the market.
They reported record segment profit of $144 million for the year and segment profit margins of 47%.
Within 1% of B is all time high.
Hey, TG aircraft online <unk>, 8.5% to end the year at 5669.
This number has grown by nearly a thousand AOL since the end of 2017.
I'm carries with it the strong recurring revenue stream, which characterizes to be a business.
As I've mentioned, our VA division has not yet seen any meaningful impact from the krona virus outbreak.
Assuming this continues to be the case as we look toward 2020 for business aviation.
We expect service revenue to grow approximately 10%.
It wouldn't be surprised to see equipment revenue declined somewhat largely due to some expected rebalancing of inventory in the distribution channel.
We expect to see segment profit dollars increased for the year in spite of a planned increase of $10 million to $15 million in Opex during 2020 <unk>.
For the development of Gogo, Fiveg, which is scheduled to be introduced before the end of 2021.
We expect da's capex to increased by $15 million to $20 million in 2020 versus 2019.
We're very enthusiastic about Gogo fiveg and it is on track in terms of both schedule and cost.
As we said from the outside of this program, we expect to spend approximately $100 million in total opex and Capex for Gogo Fiveg.
Although we now expect capex to comprise approximately two thirds. This total versus the 50 50 split we previously expected.
We remain convinced of the value of our business Aviation Division. So what is not yet been unlocked.
As I've described VA has a strong market position and the business is very well positioned strategically with a robust product road map.
As we look at BA over the longer term. We believe this business can generate over $200 million an annual segment profit in the 2020 to 2023 timeframe.
With a strong flow through to free cash flow.
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.
Overall see me very substantial progress during the year, both operationally and financially.
We announced the signing of our first middle Eastern airline of 70 planes with Qatar, which will drive increased usage of our satcom that work in this region of the world.
We're also in the final stages negotiating contracts for some awards with current customers representing 150 additional aircraft.
Which reflect the improved economics, we had targeted during our integrated business planning process.
See a segment profit performed well ahead of expectations in 2019 with cost controls running ahead of our IBP plans and what the benefit of the nonrecurring revenue of described.
For the years, a whole combine see in a and C. R. O. W segment profit swung from negative 28 million in 2018 to positive $36 million and 29 gene.
Importantly, this 30 this 63 million dollar improvement reflects a 31% year over year reduction and C. R. O W segment loss.
To 62 million dollar loss for the year.
The strong C N a and C. R. O W. Can bind segment profit is largely due to satcom expenses under running plan and the reduction in other operating expenses, we had targeted.
Satcom costs came in $23 million below budget for the full year 2019, and we see the opportunity for significant unit cost reductions in future Satcom pricing as I've described.
The cost savings, we had identified through our integrated business plan process have also been achieved more rapidly than planned.
As you'll recall the I'd be p. identified $75 million in annual savings and see a spend excluding satcom expense between the time, we announced that plan in mid 2018, and the end of 2020.
Coming into the year, we said, we'd expect it to achieve at least half those annual savings in 2019.
In fact, we achieved 75% or approximately $55 million those savings during 2019.
63 million dollar improvement in combined see an A.M.C.R.W. segment profit over the previous year was clearly a major contributor to our dramatically improved free cash flow performance in 2019.
In parallel we've also made significant strides in working capital management.
Most of the cash flow improvement from working capital has come through inventory management practices, we implemented across the company during the year and improving accounts receivable and our commercial aviation Division.
Now I will turn to a discussion of the operating performance spur commercial aviation North America.
Service revenue of $85.5 million declined 4% in the quarter due to the American Airlines de installs.
Excluding American Airlines service revenue grew 16% from Q4, 2018, and 8% sequentially and it was up 14% for the year as a whole.
Segment profit was helped by continuing a reduction in operating expenses in FY <unk>.
Reported net profit excuse me net ARPA of $112000 for the quarter was essentially flat with the prior year.
But excluding American airlines that ARPA was $133000 up 5% year over year.
Take rates of 13.6% were up from 12.9% in the year ago quarter and were 15.1% Excluding American Airlines.
Now, let's turn to see Aro W, which also delivered a strong fourth quarter.
Service revenue of $23.1 million grew 20% over the prior year period, driven by an increase in the number of aircraft online.
Equipment revenue of $20 million declined from $27 million and the prior year period.
Both years included the same number of aircraft installations at 77.
The decline in equipment revenue. This year was due to a lower mix of installations under the airline directed model.
Net ARPA declined as expected due to dilution caused by new airline partners as we saw an 89% year over year increase in AOL from New Airlines.
The segment loss of $15.1 million represents a 37% improvement from the fourth quarter of 2018 and as a result, a strong cost controls and increased satcom utilization.
Operating expenses defined as EDI and de sales and marketing and Gionee were reduced by 22% or $4 million from the prior year period.
These operational improvements reduced this C.R.W. segment loss by 31% for the full year from a 91 million dollar loss in 2018 to 62 million dollar loss in 2019.
As we moved from a discussion of our historical numbers to our outlook. Let me describe how we're approaching this in the context, the highly uncertain environment created by the Corona virus situation.
Gogo is in the midst of a significant transformation.
And before the krona virus upset all of our worlds, we were looking forward to sharing our confidence in the structural improvements in our business.
We expected to continue into 2020 <unk> and beyond.
And that's parent I'll provide an overview of the expectations, we would have sat for the year and the absence of the krona virus outbreak.
But we will not be providing formal 2020 guidance as we would normally do on this call.
First let me provide some context for both our adjusted EBITDA and free cash flow expectations, and then I will share the numbers.
As I've described adjusted EBITDA was on track for a very nice three year trajectory coming out of the turnaround beginning in 2018 [laughter].
Free cash flow was also on track.
As Weve side, it's Rob 2019 were able to achieve the working capital improvements faster than expected.
Well this dampened the year over year improvement and free cash flow from 2019 to 2020, the aggregate to your cash flow improvements. We cited on our IBP called in late 2018, we're very much on track.
The accelerator working capital improvements have resulted in cash being higher at the end of 29 gene than previously expected.
Also as a result of cash flow timing, we had expected flat to slightly declining year over year free cash flow improvement from 2019 to 2020.
But we were still targeting positive free cash flow in 2021.
We have many levers we can pull to preserve cash let me highlight just one.
On the current schedule, our total spending for Gogo Fiveg.
Peaks at just under $50 million during 2021 with about three fourths of this spend in capex during that year.
We are very enthusiastic about the prospects for Gogo fiveg, but the pace and number of towers. We deployed is within our control and could be varied as may be required by external circumstances.
In this context, the 2020 guidance, we would have provided on this call without the impact of krona virus is summarized as follows.
Total consolidated revenue of 830 million to $875 million, reflecting the absence of $35 million in nine recurring CA revenue we saw in 2019.
We expect that service revenue to be higher in the second half from 2020 versus the second half of 2019, including growth in CA anyway as the underlying growth is no longer masked by American Airlines Stephens calls.
We expect to see any revenue of $350 million to $370 million with approximately 5% from equipment revenue.
We expected C.R.W. revenue of 165 to 180 million with 40% from equipment revenue.
We expect to be a revenue of $315 million to $325 million with segment profit in the mid to high 40% range.
We would have provided adjusted EBITDA guidance of $120 million to $145 million.
Finally, we expect an increase from two K. you aircraft online of 325 to 375.
Again, we believe we were set up for a very solid year and our financial performance was ahead of our internal plan for the first two months of 2020.
We will plan to provide an update on our outlook on our first quarter earnings call or earlier if appropriate.
Because I conclude my prepared remarks, I want to join Oak and thanking our employees for their contribution to our strong financial results in 29 team.
We know that as we look forward, we have our work cut out for us as we face a new set of challenges none of us could've predicted.
We are grateful for your extraordinary talent and commitment as we face them together.
Operator, we're now ready for our first question.
Thank you know as remind you were asked the question you want me to press Star one on your telephone.
Hi, Good question press the pound <unk>.
Our first question comes from several of Roth Capital Your line open.
Hey, good morning, Thanks for taking my questions I'm open very great job in the fourth quarter I know, it's an unprecedented environment that we're operating in so we really appreciate the thoughtful commentary both to business the industry and really appreciate the transparency Barry just quickly in terms of gross margins within she services looked like it was down.
I Wonder if you could clarify if there was anything going on there and then if I could on the the CIA side of the business can you give us some idea in terms of what subscriptions or revenue looks like relative to a onetime usage.
Maybe give us an idea of what the real time or per per plane is looking like on a daily basis to help us kind of calibrate.
The impact that's ongoing and lastly, if I could on the be a front.
Continues to do extremely well it seems like it's on fees at this point in time I was wonder if you had any additional color related to traffic patterns with a private jets in general that you're seeing on that front and remind us in terms of some of the contracts because it's more subscription based you know what historic churn, maybe it's been what cancellation policies looks like is it.
Looks like that business is pretty healthy and I know the parallels early in terms the international travel in the Asia Pacific region were still strong and actually increasing wondering if there's been any near term impact on that front, thanks, and I apologize for the link the questions.
Hi, Matt I'll try and take a couple of those I'll turn it over to vary for the margin.
Question.
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Do we don't I mean in terms of ARPU per aircraft.
I can't really give you that this week, we we you know the way I reporting works is we don't get that on a daily basis, we should but we don't you know trends I noted the trends this week, we see a big.
Big airline customers in the U.S. down around 15%.
You know yesterday's numbers were probably we're off to add a little bit interesting take rates.
Yesterday take rates are quite high.
Lights, where about even with the week before.
But I suspect load factors were much lower because revenue was a was down so that that's you know kind of current view of what's going on in in the North American market.
The you asked about business aviation.
We actually.
I've been talking to our charter or customers as well as some of the fleet operators you know there've been a few cancellations on corporate side, because you know events are being called off et cetera, and there's been I sort of a pick up on what I'd call. The personal inside of people need get from 0.8.
Might be it and not wanting to take a commercial airlines are unable to take commercial airlines. So that's that one.
You had ARPA you would be a what was the one on the Pacific I'm, Sorry, Your Asia Pacific question.
Oh, sorry, I've got it was more related to just the parallels in terms of traffic had trended early on with the krona virus spread there, but you already addressed I just wonder if I could on the BA side. So it's a business now.
Segment did I know, you're trying to provide more transparency and clarity in terms of.
Corporate overhead, but it is a bit to be a business segmented that it could actually easily be split at this point in time in terms of your additional costs and satellite costs et cetera, and then again just for very gross margins on CA North America.
What American service, it's hard.
Yep Yep Yep, Okay. Now we've moved the whole ATP network ended the BA segment.
Run out of business aviation. So you know it is a self contained a unit at this point it it could be split off quite easily. So yeah. We did that so that we could should demonstrate the value of the two businesses in a pretty clean way I'll turn it over to Barry to talk about the gross margin to see.
Yeah, Scott the primary drivers in CA North America or was it was an increase in the dollar spend and sat com. The actual department cost came down as.
As we described in conjunction with our overall I'd be plans I mean, I would say just as a reminder of the sat com cost overall came in well below budget, a as I highlighted in the prepared remarks, but for the fourth quarter. The dollar amount increased as expected for that period of time. There there are kind of there's some lumpiness.
In the timing of those increases in satcom. So that's what was reflected primarily in the fourth quarter.
Well I'll follow on one point on the Asian traffic up.
No we saw an impact there early on with the Hong Kong go test last year some of that lingered into early this year.
Japanese travel down a lot starting to last week of February.
It early March like down 50% inside this is probably within Japan.
Interestingly now, they're starting to open up travel within China, a there if you can believe the statistics from China they've done.
You know the number of new cases, this down way way way down and the number of death is way way down and so we are hearing boom or actually that they are starting to fly again in China.
So you know just getting might might be a little sprague of agree Hello [laughter] that.
That the travel markets can rebound.
Great. Thanks, so much nice job.
Thanks, Scott [laughter]. Thank you.
Question comes from Simon Flannery of Morgan Stanley Your line is helping.
Thank you. This was Landon park on for Simon couple of questions for US can you run through maybe on the revenue side on C.A. what is your.
Breaks to versus subscription revenue.
Or fixed versus variable revenue on that front and and as well on the cost side, maybe can you size your fixed versus variable costs, including how much contracted satcon costs. You have a you know for 2029, just lastly on Delta.
Yes. It is your base case assumption at this point that you.
You will begin to lose your soul.
Provider status, what time, an art to your knowledge or you still in the running for the Athree 21 Neo Award.
Okay. That's a lot of questions land and let me.
Start with the beginning which was the break down about 25% of our revenues our monthly service pass and about 75% are in air purchases. The data I shared earlier around the in air purchases.
We.
Or have not seen a drop off in monthly service path it yet, but those do churn.
And we could see a drop in that it travels in packet for a long period of time and people don't see any value and having those passes so.
I don't think we can take we can take some comfort in it that that some of that will persist, but we could drop off and that as well.
And we're planning and that's in our planning right now.
Second question I believe was variable versus fixed.
Fixed cost you know <unk>, our biggest counterparties are obviously airlines in satellite companies and the you know you one can look at the satellite contracts and think their fixed but they also.
You know it can be renegotiated we have.
We've identified 16 levers of cost control that were working here.
[noise] Counterparties as one of them you know we are very valuable customer to the satellite companies. We are the largest customer for a few of them.
We are the fastest growing customer prior to Corona virus in we will be the largest customer and fastest growing after thrown a virus path. So there's a lot better for them to work with us, though to help us get through.
This is Dennis.
Well the airline side to Oh, we have a lot of subsidized equipment deals and other things and we will be going back to airlines and asking for ways to restructure our contracts and you might say well why would they do that well you know.
Like I said in my comments.
I see at a number of airlines is the number one driver of how their net promoter scores go where their customer satisfaction scores go.
It is actually very important.
And yeah, I think that airlines view, it as being very important if there.
Good supplier of I think I remain healthy so we will be talking to them well. So there is you know counterparties that are going to be involved in our cost reduction plans and so I think that is a way to look at our cost structure say okay.
Fixed but.
No one can modify.
Those arrangements [noise].
The last part of your question land that was on Delta.
Looked a a there'd been no decisions made but we know that they have let us know that they may consider that so we wanted to make sure the markets do that so I think that's you know I'll just put that out there I think we are you know we have a contract to go through 2027 and Ah you know there are.
Some outside those contracts for Delta, but we think we have Saudi arguments as to why those be validate probably about arguments why they think they wouldn't be valid. So it's a it's a negotiation.
We delta.
Wants a tremendously increased the amount of capacity, they're gonna be using they want.
They're going to want to have a competitive situation on the.
On a supplier sites and they can make sure they can competitive pricing and service levels.
And you know they want to change our contracts or as they go free they happen to turnkey contract doesn't contemplate free.
No we want to grow our financial relationship, but Delta and you know, we'd like to get out of imaging cash on equipment sales, which we do with Delta. So everybody wants something it's a negotiation I think at the end it'll it'll that benefit both parties.
Thanks, Oh, just two quick clarifications can you tell us what what your current contracted satcom costs are for <unk>.
2020, I assume it'll be in the K, but if you can give us that color and then you're on Delta are you.
Okay understood on the existing contracts, but are you still in the running for new awards or <unk>.
It is your sense of bad is no longer.
Yes.
Yeah, well I mean right now.
We're planning to be line fit on Athree 21, when the first one rolls off and.
At Airbus So.
Okay and on the Soc on cost thanks, Landon that got costs I mean.
We don't I don't know I'm sure we put out the exact number we do put out the commitments in the K.
Alright, the proxy, but they they.
You know as a percentage.
What we expect we expect our spend we're managing that very carefully right now so.
Vincent actual are probably right about this [laughter], yeah, and they're also some contracts.
Spartan during the course of the here. So as I've described you know, we're seeing very substantial reductions in price when we renew those contract. So we'll certainly be having those conversations the satellite providers, but yet the number that are Ics that are up expiring in up for renewal on the order a 10% to 15% during the course of this year and then that comes down and.
Naturally as I've described over the next three years that Oh.
Oh, the number of commitment so you'll see a metais is $141 million.
That's great really appreciate that Barry Thanks, Linda.
Thank you and our next question comes from Lance Vitanza of Cowen Your line is open.
Hi, guys. Thanks for taking the questions I'm trying to get at the relationship between declines in commercial airline traffic and what we should expect in terms of your declines in commercial airline service revenue. So I. Appreciate the answer that you gave a second ago about the.
A 25% monthly pass is versus 75% in air purchases, but I want to try to to come out at a little bit of a different way first I guess.
Hi. This is can you tell us what the percent of revenues that are coming from airline directed versus turnkey contracts and then really you know within each of those war in in and perhaps it's only in the airline directed contracts what if any percent of your service rather.
These are being paid by the airlines you know sort of is flat feet irrespective of the flights passenger load passenger data usage et cetera, or you know or is the answer that you know virtually 100% of your service revenues are going to very directly with airline passenger traffic.
Let's let me cut that come at your question first at kind of a macro level. It kind of what is the impact overall to us and how much of that flows through so we are doing a lot of scenario planning on this how did you would imagine I give you a couple of bookends here. So for example, one of the scenarios that were.
Planning is if you look at Asia traffic being down by about 60% and you look at the rest of world being down by about 25%. So that includes calling us Canada Europe.
For the rest of the here so for the full year those very significant percentage declines that creates about a $70 million kind of hole on the cash front I'm. Alternatively, if there were no revenue from CA four three to four months, it's a similar $70 million hole. So we have identified.
Slide opportunities for cash savings to that as I've mentioned, we have the 16 levers that we've already identified the pool those amount to more than $50 million or as you. All said those some of those require negotiations with counterparties. So we want to be clear about that but but we are very actively managing our way.
Through that importantly, also we have the cash of increased from the ended the year to yesterday. It now $204 million than we had the appeal of $30 million. Its undrawn. So that's the way, we're thinking about it or more specifically on your.
Question about in the short run how much of that revenue decline.
Close through to EBITDA, you know, what it's a very high percentage in the short term.
Oh because of the relative fixed cost of that satellite spend but having said that those are some of the conversations that we want to be able to have is to help.
How discussions with our partners to ensure that we're all kind of Sherry and pain here.
I'd like.
Like.
Barry said, yeah. That's one scenario we're also.
Developing plans for more draconian scenario is if they should emerge.
Well, that's that's really helpful guys. The 70 million is the this cash you know shortfall is that versus versus you know your previous model or when you say $70 billion whole do you mean that is that you know that you would be.
He you know without doing something that you would you know you'd be $70 million below the minimum amount of cash that you need to run the business I'm just not sure. What you meant when you said $70 million pool, it's a relative to current plans basically okay. Great got got so then and then just again I mean, I I'm not sure him and we can follow up offline.
And if necessary, but really what I'm trying to get on the my question about the flat versus versus variable rather news right not the flow through to EBITDA, but just.
If I just to take it to its logical extreme right. So if you had an airline customer that had zero flights in the quarter would that airline customer pay gogo zero dollars or would there be some you know monthly amount that would get paid just because you're still standing ready to provide service.
We have a monthly revenue guarantees and some of our contract.
But not a lot and.
We are in more and more recent contract we have been negotiating monthly revenue guarantee you do have one relatively new contract, which is a flat feet. The IR a contract, but you know it allow the revenue yet it does depend on in flight connectivity sessions for a use of our.
Vision product.
Or a free messaging.
We do get Oh, we have some of our free messaging. It is on a per passenger boarded basis.
Again, that's not a huge amount.
Okay and just one last question for me on the Delta.
<unk> sourcing from and I apologize if I missed the Sun book when your last answer but would would this refer you know only to new planes or or is there some thought that the delta it could be install some of the existing gogo jets like what happened with American Airlines, a few years ago.
Yeah, it's not like the American Airlines situation and that the American Airlines contract with a lot different from the Delta contract and so [noise] and was you know.
Frankly, you know close to the in contract as well. The fact that we didnt have really have a chair satellite product at that point now we've got two K. you would you know I think a that two k. you is as good or better than any other IC product in the world right now.
So that the situations a lot a lot different than American you know I'm not going to comment Uh huh.
On what deltas plans are I will say this applies to the domestic fleet.
We.
No, leaving the Delta just talking about their plant they have not right. Now frankly, nothing is decided so you know I I wouldn't be making things up if I gave you an answer I don't want to do that.
No. That's helpful. Thanks, guys very much I appreciate it.
Excellent.
Thank you and your next question comes from Philip You sat with Jpmorgan. Your line is not something.
Hi, guys. Thanks, Oh can you talk more about industry consolidation and are you considering selling parts of your business as well as buying or emerging other things.
Yeah, I mean, I'd say everything's kind of on the table because these are dynamic times at industry.
Nice to see some consolidation and there's a lot of conversations taking place.
Between different players and the eco system, some people to get more vertical integration play some people eat more horizontal.
The integration place. So you know, we we do think that see a business doesn't need to see some consolidation, we think that gogo by virtue of our market share by virtue of are really strong distribution product road map engineering systems integration capability.
Et cetera is a very important component of oh of the industry and give a lot of value to somebody who really wants to be a big player industry. So that it's how we look at it I think there's you know I don't want to mislead people. The thing that there's anything imminent going on but there is a lot of conversation taking place.
Yeah.
Okay. Thanks, and then second on the 125 to 140, what was the 120 to 145, you would've guided to set a clean comp versus the one in 2019, what are the puts and takes there. Thanks.
Yeah. So it is a clean comp in the sense that it does not include recurring revenue so that benefit that we saw in 2019.
Excluding so of course that takes the with the 146 from Miss from 29 came down to the 115. So the 120 to 145 is what we would have guided to I. Just I was just on the straight up basis coming into the year.
[laughter] thanks, guys.
Next thing.
Thank you and ladies and gentlemen, this does conclude and question answer session I would now like to turn the call back over to only thorn for any closing remarks.
Thank you. Thank you for attending a Q4 20, Nike <unk> Oh.
As we pointed out you all know very very uncertain times.
We expect revenue to fall pretty dramatically as we said until the pandemic is path.
Start with a strong cash balance and we feel we have identified levers if we execute well allow us to reduce cash spend in concert with revenue declines and to maintain our liquidity.
Underneath it all we have two very valuable business isn't growing in Underpenetrated markets and we're determined to realize the strategic value of those businesses for our shareholders and employees. The thanks again, and we look forward to talk again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating may now disconnect.
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