Q1 2020 Earnings Call
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020, Gogo Inc. earnings Conference call.
At this time all participants on the listen only mode. After the speaker presentations that will be a question and answer session.
The ask a question during the session you would need to press star one on your telephone.
If you require any further assistance please press star zero.
Now I'd like to hand, the conference over to your speaker today to Mr. will Davis, Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you dilemma and good morning, everyone welcome to Gogos first quarter 2020 earnings conference call.
Joining me today to talk about our results are I'm pleased to warn president and CEO.
Very Roe in executive.
Vice President and CFO.
Before we get started I would like to take this opportunity to remind you that 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 do consider the risk factors that could cause actual results to differ materially from those forward looking statements on the conference call.
These risk factors are described in our press release filed this morning, you know more fully detailed under the risks caption.
Oh caption risk factors in our annual report on form 10-K, and 10-Q and other documents we have filed with the FCC.
In addition, please note that the date of this conference call. This may 11 2020.
Any forward looking statements that we make today are based on assumptions as of the state.
We undertake no obligation to update these statements as a result of more information that's for future events.
During the call will present, both GAAP and non-GAAP financial measures.
We included a reconciliation an explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings press release.
This call is being broadcast on the Internet and available on on the Investor Relations section of the Gogo Web site at IR, Dod Gogo Air Dot Com.
The earnings press release is also available on the website.
After management Con Mitch will host acumen, a session with the financial community only.
It is now my great pleasure to turn the call over to Oakley.
Thanks, well and good morning, everyone.
Mike I spent a lot of time on Q1 2020 as people are far more focused on our response to covert 19.
And then on the quarter.
But I'm going to feel a little Charles Dickens to put a quarter and perspective that is the Q1 was.
Definitely a tale of two quarters. It was the best of times in January and February and close to the worst of times in March.
It was close it more sometimes because only April was worse.
We finished February ahead on service revenue gross profit EBITDA and free cash flow.
And while we managed to still exceed our EBITDA and free cash flow targets for the quarter.
Finished behind plan on service revenue equipment revenue and gross profit.
I'm really most of the numbers to buried but that share a few that demonstrate the drop off and on March business.
[laughter] feeling.
And I see a north American segment service revenue averaged 28 million per month in January and February.
Then fell 35% to 18 billion in March.
ARPA fell 36% from January and February to Mark and growth passenger opportunity fell 18%.
In our CA rest of World segment aircraft online grew 30% over prior year for the quarter, but despite that grows faster opportunity fell 25% March.
And then I pay Pal business Aviation segment daily flights dropped 27% from the month of January February to the month in March.
The drumbeat of week over week steady declines began in Asia in late February.
By mid March was in full effect in the U.S. and rest of the world and carried through April.
The only now in May do we see some green shoots with a big increase can be a flights per day and encouraging increases and see a passenger traffic in daily sales.
And these troubled times, we're laser focused on our liquidity and long term solvency and towards those ends we developed a three track plan of attack.
And operating track focused on medium term liquidity.
A strategic track aimed at realizing the value of our two businesses.
In a financing track aimed at Backstopping. The first two tracks should we need it.
So let me talk about those three tracks in more detail starting with the operating track.
The impact of coal that on our markets has been profound there's been a litany of bad news coming out of the airlines Oems and the travel industry generally.
The commercial airline market T. I say report the U.S. Air travelers are down 95% in April from 2019 level.
I had a projected global airline revenues will be down $314 billion or 55% this year versus last.
The Corona virus flight cancellation tracker reports that have the hundred 93 airline did monitors around the world hundred five weren't even flying at all at the end of April.
In theory on a consulting firm that tracks aircraft estimated at nearly 17000 of the rose 26000 commercial aircraft for grounded at some point in the month of April.
In the business aviation market, there's also been a big impact.
Business Aviation market research firm Wing Act.
Which tracks business aircraft sites around the World reported that business aviation flights are down 80% in April versus prior year.
So the corresponding impact that Gogo has also been dramatic in April.
Commercial aviation segment flight counts were down 73% versus prior year.
Because they're very few passengers on those planes.
Session counts were down 91% and sales were down 66%. No reason sales are not down as much assessment, because we have subscription plans and monthly revenue guarantees from somewhere else.
We also saw significant impact on our business aviation flights with April average flights per day down 78% versus prior year.
And a decrease of 90% from prior year at the low point on April 12.
Because of the dramatic reduction in flights.
Many aircraft owners this isn't BA a park their aircraft in the mid March April timeframe.
And approximately 30% of our 50 780, GE accounts took some action to reduce their spending with gogo.
Including 940 accounts suspensions and more than 750 service plan downgrades.
That's why the negative impact on Q2 revenue.
At the magnitude of that impact can't be determined until we see the rate of reinstatements.
All that said it looks like we bottomed out mid to late April and now we're seeing green shoots both our businesses.
There is some cause for optimism.
And our commercial aviation Division, though still way below last year T. I say passenger counts last week were up 70% from the last week in April.
For the first time since early March.
Flight counts were up for the week in fact until last week, we had not had a single day when the flight count was up from prior week last week, we were up six out of seven days.
Also last week for the 10 airlines that feed US daily data you saw passenger counts up 70% from a low point in mid April.
And also last week daily in Air sales now that doesn't include service plans or revenue guarantees.
Were up 40% over the prior week.
Granted that's off a very low base, but hopefully it indicates the beginning of a rebound.
And be a the green show a the green shoots or more pronounced with average daily flights last week at more than 200% from the low point in mid April and up a little more than 60% over the April average.
We're also starting to see suspended accounts reactivated.
218, Reactivations as of last Friday, or 23% reactivation rates, we see these reactivations really accelerating accelerated lot late last week, and we expect that to continue.
More generally in commercial aviation, we hear from airlines that bookings are starting to overtake cancellations.
There are starting to add some international routes back in May and load factors are picking up.
Assuming that as a society, we continue to make progress against the pandemic.
We think that commercial air travel will come back faster than it did after 911, because the airline industry is much more sophisticated and managing its product and marketing its product than it was 15 20 years ago.
On the business aviation side of our company. Many industry experts are saying that go that 19, maybe a catalyst for the industry.
Was it can afford to fly privately will be more inclined to do so.
Of concerns over the pandemic.
But enough on green shoots we can't afford the can't count on an industry recovery and we need to plan for the worst and hope for the best So let me turn back to the Cobot operating plan I mentioned a moment ago.
The first call about plan is to protect the health and safety of our employees and our customers.
This is especially true in our production facilities are we implemented new work rules and schedules to ensure safety and redundancy and then our labs, where skeleton crews have maintained access to critical pieces of equipment.
Elsewhere, we've implemented work from home policies in our team of over 1000 employees has done a great job of working remotely, but staying connected and working as a team.
They are starting our phase three entry into our business Aviation headquarters and Brumfield, Colorado as we follow Colorado shift from work from home to safer from home guidelines.
I'm really proud of the way our employees have risen to the challenge of adapting to new ways of working communicating and staying aligned in these challenging times.
[noise] after safety our next priority is focusing on the financial health of Gogo and creating value for shareholders.
To do this we established three goals to guide up planning efforts. They are first.
To ensure we maintain the minimum liquidity, we need to run our company.
Second we continue paying interest we owe on our debt and third to achieve the first two while preserving the strategic franchise value of our two businesses.
Our approach has been to develop and continually pressure test multiple scenarios for the depth and duration of the cobot pandemic in our markets and then develop operating plans to address those scenarios.
Operating plans in turn drive 16 cost levers that we can pull the push to manage our cash expenses.
Give you a flavor for the process original worst case scenario for the CIA business assumed a two month ground stop in the U.S. and a three month ground stop in the rest of the world.
Recovery, starting at 20% of farmer traffic and said bring back up to 80% of former traffic in 2021.
So let me walk through the levers and no particular water and give you a sense of where we are.
The first lever is our satellite partners.
We're asking them to reduce our cost commensurate with the reduction in capacity, we need to satisfy demand.
Generally they've been very cooperative as they value our future business wants the pandemic has passed.
We're close to completing documentation on terms with more than half of our satellite partners in a very close to reaching terms with most of the rest.
Well, obviously favorite partners in the future to help us today.
The second lever as airlines why themselves quite cash strapped.
But our amenable to ways, we can both reduce costs.
Our case that generally is around delaying installations, especially installations tied to older deals where we heavily subsidized equipment.
As Barry will share in a moment. This has gone very well and be very few installs plan for the rest of this year.
The third lever is delaying purchases because mostly centered around the inventory side of the airline installations I just discussed but as required extensive negotiations with suppliers, where we had pre existing orders.
The fourth fifth and sixth levers are travel marketing and not a central spending.
Obviously I need to travel has been curtailed and most of the shows that consumer marketing dollars had been canceled.
The seventh lever is focused on working capital, especially the timing of payments.
The eighth and ninth or Productize product initiatives like our Gogo Fiveg and K initiatives burden, our best case scenarios, we do not feel expenditures at all but they're not a worst case scenarios, we can delay projects and say substantial amounts of money.
[noise] levers 10 through 16 are all personnel related actions.
10 was delayed payment of my bonuses for 2019, which is done.
11, but to delay merit increases for 2020, which has also been completed.
The 12 was a hiring freeze largely done except for critical Backfills.
The 13th with reducing contractor head count, which is largely complete.
Complete.
The 14th was a salary reductions which went into effect last week, starting with the pay cut for our board of directors and then for almost all employees.
We're not furloughed.
The 15th as the Furlough program, which also went into effect last week impacting approximately 54% of our workforce.
And finally.
The 16th would be a reduction in force, which we hope to avoid but could become necessary. If we need to go there to ensure our solvency in the future.
And our best case scenario these reductions save us roughly $170 million in cash between now and the end of 2021.
The worst case scenario, they save a $330 million in cash over that same period.
We believe these savings should be adequate to tie to through to Sunnier days. However, we continually model new scenarios in cases downturn is substantially deeper and longer than our current worst case projections.
And we're developing plans to address those scenarios if need be.
I want to thank the Gogo team for the hard work and creativity, they have displayed and developing these plans.
And now so for the sacrifice all of them are making to ensure the long term survival of our company.
This is truly been a team effort and is deeply appreciated.
Now, let me turn to the strategic track.
As we've said many times in the past.
We are too valuable businesses and management views our job is realizing the value of those businesses for our shareholders.
Our business Aviation Division operates in the very attractive industry.
Relatively little consumer concentrate the little customer concentration and Underpenetrated markets strong market position and little direct competition.
We offer the industry's leading product at an attractive price relative to competitive solutions.
And be a significant barriers to entry due to our proprietary spectrum and ATP network.
Financially our recurring revenue model generates strong cash flow, which allows us to invest in enhancing our product offerings and maintaining our product advantage as we did with the launch of our boss product line two years ago, and as we will do with Gogo Fiveg.
No I'd be a business has been affected by the carbon pandemic, we expected it will recover more quickly than commercial aviation as destinations open for business and aircraft start to fly again.
I see a business operates in a more challenged industry.
Hi customer concentration.
More heavily penetrated market and a lot of competition.
Everyone agrees that broadband commercial aviation I S. C is an attractive growth industry passenger adoptions growing quickly and Oems and airlines are poised to drive more operational applications as the quality of inflight broadband grows in the future.
But no player in the industry has yet built a sustainable business and they won't let the structure of the industry fundamentally changes through either horizontal or vertical business combinations.
Gogo commercial aviation bring an attractive and unique set of assets to such a combination.
We have leading market share with attractive customers and strong customer relationships.
We have industry, leading competencies in engineering software sales support network management and other areas.
We have the leading IC product in the world and Gogo two K. you.
And we have an asset light business model that affords us tremendous flexibility as the satellite industry moves quickly toward a multi are a bit multi spectrum future.
And the multi orbit front.
Gogos unique two k. you mechanical phased array antenna.
The only terminal technology proven capable of working with an NGL so satellite constellation.
As it has demonstrated with one we have earlier this year.
On the multi spectrum front.
Gogo has developed the ability to cost effectively convert a two k. you intend to into a two k. antenna.
Which could open up the Gogo two k. you fleet to hey operators as well, Okay you operators.
Our multiyear that multi spectrum position is important to customers as well as potential merger partners customers. It means that we have the flexibility to continually integrate the latest and best satellite technologies from whomever and in whichever band they may emerge.
This has always been important and is particularly important in times of uncertainty like now.
Our open technology platform also means that our leading market position and capabilities can be combined with a wide range of potential partners, regardless of spectrum band or orbit.
We think consolidation could take a few different forms either vertical integration with satellite operators, who wants to enter the aviation market directly.
Horizontal integration with another service provider to drive scale economics.
Or consolidation by an aviation company seeking to further integrate connectivity into its product portfolio.
We believe the consolidation is overdue and the theodicy space that the depressed revenue across the industry will be a catalyst to drive that consolidation.
Wanted to make sure our shareholders or the beneficiary of that consolidation.
Now, let me finish with the financing track.
We're not in the market for financing at this time.
But we always entertain conversations with many different actors to make sure we understand the realm of the possible should our operating and strategic tracks as I discussed a moment ago not generate satisfactory results.
The only financing activity were pursuing at the present with the U.S. tragedy Department under the Cares Act, which provides two potential opportunities for gogo to receive assistance.
32 billion dollar short term payroll protection grants for air carriers and contractors.
And the 29 billion in loans among guarantees for air carriers, including part 145 repair stations like Doug.
We applied for 81 million under the grant program and 150 million under the loan program and I've heard that we are under consideration, but not yet approved for either.
Should we received government assistance, we would roll back all or most of the furloughs and pay reductions that I discussed earlier.
Obviously defer any other employee actions until after September thirtyth.
With that let me turn it over to Barry do the numbers.
Thanks.
Given these extraordinary times, we talk.
The quarterly comments to begin with the questions on the top of everyone's mind.
I'll start with the financial impact of the Cobot 19 pandemic on our business.
Then moved to a discussion of the financial implications of our scenario planning.
And I'll conclude with an abbreviated review of our operating results.
Some important context for determining gogos ability to weather the cobrand crisis is understanding our financial position coming into it.
Over the course of the previous year Gogo had strengthened into important ways.
First the business was finding its financial and operational footing.
And secondly, we were in a much stronger cash position than anticipated.
As I've described the first quarter results represent a tale of two quarters.
Through February consolidated adjusted EBITDA was $13.3 million ahead of our internal budget.
And consolidated service revenue was also running ahead of plan.
Driven by the strength of the first two months consolidated adjusted EBITDA of $25.7 million, the full first quarter slightly beat our internal budget.
This was in spite of the dramatic impact of the Corona virus pandemic during the third and after the quarter.
We believe the operational and financial discipline underlying these results provides an important foundation to build them once things begin to normalize.
Even more important than this operational foundation is the company's strong liquidity position exiting 2019 and continuing through the first months of this year.
You'll recall that we significantly overachieved, our free cash flow objective last year, as we improved free cash flow by $163 million and 29 to.
Versus the at least hundred million dollar improvement, we had targeted going into the year.
This was the result of lower investment and airborne equipment.
Adjusted EBITDA coming in well ahead of plan during 2019 and improvements in other working capital primarily accounts receivable.
We continue to build our cash balance to the first for much of this year from $170 million at the end of 2019 to 211 million at the end of April.
The 2020 figures include $22 million and proceeds from our LTL drawn in March.
Excluding this additional liquidity cash increased by nearly $20 million since he ended the year.
Without the cash flow overachievement throughout last year, and the first quarter this year.
Our cash position would've been approximately 800 million hundred $30 million versus the balance of well over $200 million actually equal.
The strong cash balances position us well to achieve the first two financial objectives Oak described.
Which we set for ourselves and we began planning a response the pandemic.
First is maintaining the minimum liquidity, we need to run the business and second is meeting the interest obligations on or debt.
We are current on an interest payments, including $45.7 million pay them. They first.
And we are in complete compliance with all of our debt covenants.
Now I'd like to expand on the operational planning approach described.
Yes on the financial and liquidity implications for drug.
We started by establishing best case in worst case scenarios and then went through a detailed bottoms up planning process to quantify the levels required to save sufficient cash to achieve our liquidity objectives.
We brought a very sober minded approach to this process.
Oh described the worst case scenario and the 16 cost saving measures in some detail.
Even our best case scenario reflected a very severe impact on our industry.
For this case, we divided the world into eight segments, and we modeled passenger declines of at least 90% and six out of eight of these segments.
We're taking a very dynamic and conservative approach to planning in this period of high uncertainty.
Well, we are seeing some green shoots we're fully prepared to execute on the actions mandated by a worst case scenario.
And we continue to update the scenarios new information comes to life.
Let me Dimensionalize, the 16 cost levers a bit more from a financial point of view.
To reiterate the reductions we've identified drive roughly $170 million in savings during 2020 and 2021.
In the best case scenario and $330 million in a worst case scenario over the same period.
The cost reductions are also front end loaded with the overwhelming majority coming in 2020.
Approximately three forcing these cost savings are either directly in our control we're savings where we have already reached agreement with a record is requisite counterparty.
The three primary Counterparties include airlines equipment suppliers and satcom providers.
Importantly, we have agreed with our airline partners to significantly delayed installation.
This action represents very significant cost savings to go between now and the end of 2021.
We have already renegotiated a purchase commitments to align with these installation delays, reducing our 2020 expenditures by at least $80 million.
Netting the forgone airline proceeds we would have received for these installations. These delays represented approximately $40 million in net cash savings to Gogo during 2020.
As I've described we've also made very good progress with our satellite partners. Your paper in the agreements we've reached with over half of them.
And the majority of the rest are in the final stages of negotiation.
If necessary. There's also a substantial amount of program spending we could reduce.
Well go Fiveg is the most significant studies.
We expect to spend approximately $100 million in combined Opex and Capex will go fiveg with Capex comprising approximately two thirds of this total.
On the current schedule, our spending because this program peaks at just under $50 million during 2021.
We could delay our gogo fiveg spending if required to meet our financial objectives.
So what does the outcome of the detailed planning exercises.
Even under the worst case scenario, we meet our key financial objectives of maintaining the minimum liquidity, we need to run the company and making our interest payments.
Interestingly under the more optimistic scenario, our cash balance at the end of 2020 actually increases by about 10% versus our original budget.
This is because a significant portion of the cost savings take hold this year and we also benefit from the NGL proceeds.
Under the worst case scenario cash declines more steeply in 2020 than originally budgeted.
But we achieve approximately breakeven free cash flow in 2021.
Because a significant portion of our cost structure is sized to match the revenues.
Of course this free cash flow metric includes making are scheduled interest payments.
Let me offer to other data points, which corroborate our expectation of maintaining adequate liquidity through this crisis.
First for the purposes of our first quarter 2020 report on form 10-Q, which we are falling today.
We have concluded and our auditors have agreed that we do not have substantial doubt about our ability to operate as a going concern.
As you know the accounting rules require that this assessment be made at the time, a periodic reports as filed with the FCC and to the 12 month period thereafter, which would be through may of 2021.
Secondly, Moody's recently issued a statement with a stable outlook.
Moody's stated their expectations that quote gogos cost savings initiatives will help the company mitigate the impact of the disruption caused by the krona virus on its EBITDA and that the company will maintain adequate liquidity over the next 12 to 18 months and quote.
Importantly, our financial planning does not assume any benefit from government funding. Although we have applied for an 81 million dollar grant and a 150 million dollar loan under the carriers Act.
We've not yet heard whether we will be allocated any of this capital we would hope to hear response.
In the coming weeks and as we do we will respond accordingly.
I'll now turn into a discussion of our first quarter operating results beginning at the consolidated level.
Total service revenue was $150.8 million for the first quarter down 9% over the prior year period.
This was driven by a 23% reduction in service revenue in March versus the average for January and February reflecting the impact of Kogan 19.
In spite of this revenue decline, we recorded adjusted EBITDA of $25.7 million for the quarter.
Which was well above consensus estimates.
Free cash flow was solidly positive $22.7 million for the first quarter.
This was an improvement of $57 million year over year, but a large part of this improvement was due to the shift in the timing of interest payments as a results of the refinancing completed in may of 2019.
Adjusting for the impact of this change free cash flow improved $11 million from the year a great quarter.
For clarity, let me summarize the impact of the cold would pandemic on this quarter's financial results.
In addition to the lower.
Pete.
One affected adjusted EBITDA and the other two are excluded from adjusted EBITDA.
The first item was a charge of $6.8 million credit loss reserves.
Majority of which was related to a single international airline partner, which went into administration during April.
This charge is reflected in our gionee expense for the quarter.
Adjusted EBITDA would've been 32.2 $32.5 million without this charge on par with the fourth quarter and this is in spite of the significant revenue impact of coated in the month March.
We also recorded two asset impairment charges totaling $49.4 million during the quarter, which were largely related to cope with 19.
First and most significantly we wrote down airborne lease assets by $46.4 million for three airlines with future cash flows are not expected to exceed current book value.
These are airlines operating under the turnkey model under which we carry assets on our books.
And it primarily affected agreements, which include significant equipment subsidies, which been offered had been offered in years past.
Colin negatively impacted our assessment of the revenue from these airlines, resulting in an asset impairment charge this quarter.
The second impairment charge was a $3 million write off of an investment in a technology development company made in 2017.
The company had recently come to terms to be sold at a price, which would have resulted in a profit to go.
But the sale was cancelled due to the pandemic, which forced the company into administration.
I'll now discuss the operating results for our business segments, starting with business aviation.
BA posted another great quarter.
Service revenue increased 8% to $57.7 million with units online increasing 70% to 5713.
ARPU, increasing 2% over the prior year period.
During the past two quarters BA has grown hcg units online by 19% cumulatively on the strength of the advanced product line.
Total revenue increased 1% to $70.9 million as equipment revenue declined 20, plus 4% over the prior year period.
This decline was due in part to the record equipment sales, we achieved in the fourth quarter, which included higher year end purchases by our dealer channel.
Be achieved $35.9 million and segment profit during the quarter with a record high 51% segment profit margin.
This was driven by five percentage point increase in service revenue margin over the prior year period.
This record segment profit margin was in spite of $2.1 million in operating expenses incurred for the development of Gogo Fiveg during this quarter.
Now, let's turn to a discussion of our commercial aviation Division results, starting with CA, North America and rest of world on a combined basis.
CA in particular represents a tale of two quarters.
Combined service revenue for the month of March was down 34% versus the average for January and February when the upper results followed a similar pattern.
For the first two months of the core to see a in a and C. O W generated nearly $10 million in combined segment profit significantly exceeding plan.
See in crude and 11 million dollar loss for the last month, resulting in negative $1.5 million in combined segment profit for the quarter as a whole.
We increased two can you aircraft online by 104 during the quarter as installations were generally on pace with the levels of 29 tea.
As we've discussed a major source of cash savings in or Cobot 19 response plan comes from the delay into can you installations, we are planning with our airline partners.
As a result, we now expect installations for the balance of the year to be minimal.
We also continue to monitor the number of parked aircraft and those that may come out of service as these actions could affect the number of aircraft online.
CA North America total revenue declined 17% to $80.1 million and service revenue declined 20% over the prior year period, reflecting the impact of cope with 19.
The year ago quarter included approximately $70 million and nonrecurring product development revenues as well as the impact to the American Airlines business model shift and the de installations.
Excluding these two factors revenue was almost flat over the prior year and would have grown but for the impact of dependent.
See a in a segment profit declined by $15 million from the prior year driven by lower service revenue.
The impact of this revenue shortfall was significantly mitigated by 32% reduction in operating expenses.
Pretty easy, India sales and marketing and Gionee over the prior year.
This demonstrates the financial and operational discipline being exercised across the company.
See any aircraft online increased to 2480 at March 31st 2020 from 2412 at March 31st 2090.
This increase in AOL was despite the plan removal of 103 older mainline HPG aircraft, which occurred in the last three quarters of 29 tea.
The C. R O W business posted total revenue for the quarter and $33.4 million, an increase of 1% over the prior year period.
Service revenue decreased 3% to 19 point.
Fully offset the impact of co good night cheap.
Equipment revenue increased 8% versus a year ago.
Our MW segment loss was $17 million, a modest improvement from a year ago.
Our substantially improved equipment margins would have narrowed this last further but this quarters our old W. segment profit includes $5.4 million or the charge to credit loss reserves I previously described.
Excluding the impact of these reserves, which are largely related to Kogan 19 segment loss would have improved 36% over the prior year period.
Our E.W. aircraft online increased to 833 at March 31st 2020.
Up 192, or 30% from 641 at March 31st 29 team.
ARPU declined due to the increase mix of aircraft him on seasoned airlines and the impact of covered 90.
Arpus for the month of March was approximately 30% lower than the January February average as we began to see the impact of Cobra during lunch last month to the quarter.
As I conclude my prepared remarks, I want to each optically reaffirm our commitment to successfully steered gogo through these times.
Of course, the impact on the aviation industry has been dramatic and we are swept up in these challenges.
But we have worked very hard to bring an objective perspective to the situation.
Develop 16 levers, we can pull to significantly reduce costs.
And that we are executing on these plans.
And there's more we can do if necessary at both operationally and strategically.
We will size our cost savings actions to match the magnitude of the cobot impact as it unfolds and we will continue to press forward with the industry consolidation opportunities, we see informing us.
I also want to join Oak and thanking our employees for your courage commitment and creativity and addressing these challenges.
You've brought real solutions are reinventing processes and your can do spirit is inspiring.
And you're doing it all while working remotely. Thank you again.
Operator, we're now ready for my first question.
Thank you as a reminder to ask a question she will need to press star one on your telephone to withdraw your question press the pound key.
I show. Our first question comes from the line of Philip Cusick from JP Morgan. Please go ahead.
I think you oak, we've been talking about M&A in the space. Since you came back as CEO and for a long time before.
Is this crisis create any urgency for strategic decisions.
And to vertical or horizontal seem more viable today. Thanks.
Yeah I think.
You know People's revenues are down.
In the I FC space, and I think that accentuate the issue of scale and I think that makes it took place there. The fact that the that nobody has scale horizontally vertically people are also obviously, taking a hit or on the reduction in I FC sending people like us and.
Other service providers coming to satellite companies and and looking to you know.
Share in the pain, if you will and but you know it remains an attractive market for both satellite operators and and service companies in the long term and and I think that you know the opportunities created by combining in terms of scale are are highlighted by the fact that your revenues are down you know you could.
[laughter], we combine you've got you know you've got more revenue indicative on cost structure.
You know makes a lot of sense, so I think if anything and accentuated.
I wouldn't want speculate whether vertical or horizontal more likely.
There's lots of industrial logic for either to be honest and you know obviously I think there's a lot of conversations taking place right now and or you know I think you have it will all come out in the Washington terms of what makes the most economic sense to two.
The boards of various companies involved.
So just to push back a little bit the.
The satellite <unk> ecosystems beaten up there's not a lot of equity value there.
Yeah, I have seen spaces beaten up.
I can't imagine that a lot of airline suppliers are feeling great right.
How do you actually kidnapping here.
Or to somebody has to just.
Come in with new capital to roll the space on.
Well first of all valuations are relative.
So you know if you're looking ahead.
Stock merger opportunities that type of thing you know and everybody stocking is deep down.
That helps.
To some extent.
And you know it also frankly in you know in our case I think the public markets don't really understand the value.
Of the company and I think strategics do so you know I think that Theres, just a dislocation there and hopefully we will look for some adjustment in that dislocation as part of the deal.
Okay, and one more if I can any update you can give us on the satellite deals he said.
Half or close to or to sign something new what kind of pricing.
Could you see out of that and then also or Youre concerned about availability over time.
Are there any changes in construction or launch timing kind of.
HM.
No I would say this in terms of.
That's all price reductions long term, we see that coming as you know new launches take place.
And obviously, we're still talking to our various providers about their launch plans.
And most launch plans you know appear to be sort of on track or you know Dubai delayed by months not not years.
In terms of they the breaks were getting you know it's a sharing in the pain. So it's the you know kind of it.
What we're getting from that satellite company says look okay. What your revenues are down here, we'll share in that pain here, but that's not going to.
Those deals won't be long term the now if we recover they're going to go back to the pricing that we're getting from us before I cover.
So.
I would say, there's really two things to think about one as you know helping go get through this period when demand is way down.
That that's not long term structural I don't think and then on the other side. What is structural is that as new satellites go up pricing is coming down dramatically I think in the last call I talked about the number of contracts. We have up you know rest of world segment over the next three years.
And it's something like 60% or something like that but all of those are rolling over and they're going to be in much cheaper satellites going forward and that's I think more was up though the structural.
Pricing changes take place.
That that will improve our economics on the long term.
Okay. Thanks, Susan.
Thank you bye.
Thank you on next question comes from Ric Prentiss from Raymond James. Please go ahead.
Yes. Good morning, first I hope you your family's employees friends Allstate, Okay. During this crazy time.
Thanks.
We walk through it.
Wanted to circle in some of.
Phil's comments, then you mentioned.
Well the contracts would not last a long time hope you through the period.
How should we think about when do you know are you headed towards the best case, when do you know you're headed towards the worst case.
Under the intermediate steps that kind of let you know.
Which path.
Yeah right.
No it's all.
Frankly tied to flights load factors.
I would be the two biggest drivers we actually don't stay locked into our best and worst either because circumstances and changed a lot and if one stayed locked in what one would have thought was the worst case eight weeks ago would look like a very rosy case today [laughter], we we consistently out revising and trying to develop.
Up new scenarios that might be worse than worst case et cetera et cetera. So we have to say a flexible in that regard.
Kind of the structure for how we go about planning in the 16 levers remained consistent across all those scenarios, but you know because obviously pull them to different levels, depending on the scenario.
No it off the big thing our return about a passenger traffic and the things that will drive that.
You know we've seen very high.
Take rates during the crisis, but there hasn't been many passengers so it's not very meaningful.
You know if we can if we can hold on to.
Yeah, probably won't hold onto the as high as the take rates are today because of the fact that that you know flight attendants for instance, where all online and they are not you're not going to at least another <unk> a flight attendants on flights as flights come back, but you know if we can if more people will use in flight connectivity when they come back because.
Some are used to being connected they've been working online from home now everybody is connected to this point. It seems I think that people are going to want to be connected when they fly.
So we expect will take rates to be up yeah. This a passenger traffic comes up we think that will be you know the key trigger for us in terms of understanding you know how much we have to cutting win.
Sure and obviously a lot of moving pieces here on the satellite costs, the furloughed employees and compensation reduction.
Any thought about providing quarterly guidance given how many moving pieces there are but not much clarity on the full year.
Yeah I think.
We thought about it for this quarter and never get scale too many moving parts I mean, some of the green shoots I talked about.
In my script literally appeared last week, so things are happening and change the situation is changing and trade dynamic a as soon as Lisa I think we've got a clear path view of what's going to happen I think we'll go back to giving quarterly guidance first and then probably back up to annual at some point.
And you gave a little bit of color on on April.
Any thoughts about how we should think of overall revenues or EBITDA performance in April if that does prove to be mid April was kind of a low point maybe.
Yeah, you can pretty much nailed the low point that April 12 that was the lowest day for our business aviation flights and I think that was the lowest day for passenger count on on our airline in terms of guidance around that stuff I'm going to turn it to value because he he does the numbers.
<unk>.
Well if you look as you know, it's just very difficult to predict at this point. So I think we would just be getting probably too far out over our skis DARPA too much about that but but to your question about quarterly guidance I think as the situation does stabilize which we hope to see beginning to happen in this quarter may make.
Sense for us to provide quarterly guidance and I would just underscore the point oak made about this being a very diamond dynamic planning process and we are continuing to work scenarios real time information comes in so I think is that finds its putting it is if we begin to that has some better view of the future, we maybe able to.
Give.
Some guidance you know in the short German and Oh out overtime the be a business I would just comment is under the same general.
Dart Tata Cobot, obviously, but not nearly the same effect and also the the drivers of that coming out we think are going to happen more quickly. So I think we also monitored the differences in those very carefully and so as we look forward to what BA and CA look like over time.
You may be able to take about those differently to.
Great. Thank you yeah.
I think we.
Yeah, well I think we aim people that they that we thought April revenue was down 60, 80% in our CEO business.
And you know, it's coming back up you know a bit right now, but you know it's hard to tell you know how fast that will come back.
Be a on the other hand, we talked about the suspensions those obviously will hurt revenue in April but we've already.
You know had a pretty big come back in terms of the numbers suspensions being reactivated a suspension normally is somebody goes in for maintenance and they you know a lot of trying to serve as off for a month and we've got to do that that that usually runs like 40, a month, we all the sudden we had 900 something.
In that in the March April timeframe, 200 of which has come back.
Mostly in the last week. So you know that it's very hard to predict if that rate continues in terms of reinstatements.
You know April could be impacted but I may make pick up pretty good and June could be back to normal, but you know that it's hard to predict if that pace of reinstatements will continue or not.
Makes sense, thanks, guys and good luck as we make it through this.
Thank you.
Thank you.
Next question comes from Lance Vitanza from Cowen. Please go ahead.
Hi, guys. Thanks for taking the questions I wanted to focus on liquidity and a few questions. There and first maybe just an easy one of the $20 million I think you called out a 20 million dollar increase in cash pro forma for having gone revolver from the end of 2019 was that through.
March Thirtyth 30 for or would that today's date.
Yeah that was really through April Lance so that cash build went from 170 million to the 211 million at the end of April.
I mentioned that we have the the payments for our interest that or in May. So the first of those for 45 plus million was made on may 1st and then that the payment for the convert interest is also a made so when we were trying to make was that the cash and significantly improve during last year and since the end of last year.
In part due to be able but also because of the operations.
That's great. Okay. So you said the past I think that you consider sort of 100 million as youre minimum liquidity threshold I'm wondering if that's still the case, where if that has become a smaller number in response to changes that you may have made and and presumably whatever your threshold is you know it thresholds lowered the.
After you make your your barn coupon is that fair.
Yeah, Let me just clarify one thing you said, there Lance which is we didn't really view the minimum threshold for liquidity as $100 million previously what we had said as our projections maintained liquidity above $100 million, we can operate with meaningfully less than that.
And to your point, the minimum amount and the requirement will start fluctuate based on the time to get the interest payments.
So expense levels changes, we implemented somebody's cost measures, but you know when generally we think about targeting at least on the order, it's about $50 million or some for operating liquidity and of course. This includes making are interesting because after the interest payment. So that's kind of the the zone that we have targeting as we targeted as we go through that's plenty.
Exercise.
Great. Okay. So then I think buried actually you'd called out I believe it was 40 million call. It net cash savings that I believe was related to slowing the pace of the two k. you installs did that 40 million include equipment revenue associated with the installs as well.
This is sort of like the all in kind of number.
Yes, so the actual slowdown in purchases will be at least $80 million on and those are the deals that we've already negotiated with her supplier channel and then that 80 million dollar number gets offset by the forgone proceeds from.
Airlines that we would have received so so you're right. The net amount that was 40 million and that's just the amount for 2020, so just to clarify that so that the savings amounts.
Okay and I both quoted in aggregate were 420 and 21, so that 40 million.
Really comes it this year, which is important.
Got it understood what about satellite capacity can you and obviously has a big bucket can you range that force in terms of skis worst case scenarios.
Go ahead okay.
No you good there [noise].
Well I mean, I mean, as you know, it's a single why not <unk> largest line item cost and nor our philosophy or struggling aim is to sharing the pain. So we're really seeing the stat comes to reduce costs commensurate with the reductions in capacity, we need to satisfy demand. So.
But you know that that number is it's in that in the tens of millions of dollars also for this year.
As we look to what we think is an appropriate amount and.
So it's a it's a very substantial number I wouldn't want to get too far.
Over that because we're still in these conversations but I think what we've been very pleased with the benefit that we received so far.
And that the sound like companies have been cooperatives, and I would just say that the numbers that we're seeing from those we have come to terms with or out or the outflow members that we have modeled.
[noise], what about the five GE roll out could you could you repeat we said about the cadence or spending 2020 versus 2021, and and how that might be deferred.
Yeah. So the total amount of spending for that program is about a $100 million of which two thirds is capex.
I want to effect. So we think about this in terms of the development costs associated with really developing the technology and then the rollout of this.
Of the Gogo Fiveg as we deploy the cell sites, so $50 million five zero.
That spend in 2021.
So that's the peak year of spending so so in the likely case scenario, where there's really very little delayed, but we could we could certainly delay that program. We would think about it in those two parts is.
Well, we would maintain the development until we have the the technology deployable and then we can can easily them very the deployment of the cell sites and you don't have to have of course, nearly all the fill sites up in order to get the Gogo Fiveg experience. They can be deployed in part and then you later.
In the additional cell site deployment as required to service.
Capacity needs. So so that's something that we could do.
It says no meaningful amounts of cash of that $50 million really in 2020.
So last one for me is on the other carriers Act with respect to the hundred 50 million dollar loan application.
Your first lien, noting denture I don't think permits incremental debt of any kind of the guarantor level, whether secured or otherwise. So if the application what first of all maybe I'm misreading that but if the application as productive as approved.
Would you expect to SAS note holders for a waiver or am I misreading that.
Thank you.
Well.
First of all have to see kind of if we receive that money. How it's structured so is that at the holdco level or at the Opco level, Although you don't they think that.
The that were structured up at the.
Holdco level, so structurally subordinated to the first lien debt. That's obviously the first lien holders would on the more being able to that but I think the the other part about this is that might bring in this additional buffer liquidity for help liquidity that we could have a very constructive conversation with her with their holders around that.
Thanks, guys.
Thanks, a lot of it.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
I show next question comes from Louie Dipalma from William Blair. Please go ahead.
Hey, Luis burying real good morning.
Running.
Hello, I Hope you guys are doing okay. During these difficult times.
Okay I'm a subjective.
10 show industry consolidation three of the.
Potential horizontal consolidators use k. a band can you provide anymore color on your comments regarding the Optionality is.
Being able to potentially.
Migrate a two k. you system to two to K or or two Kay.
Yeah.
So we've worked with our supply or a way to potentially pull out the desks on the top of the aircraft that sit inside the antenna terminal structure.
Pull out the K., you guess and replace them with K death.
And then there are a couple L. R. U box is inside the aircraft it it would need to be swapped out as well, but you know that doesn't require you know any real change for the structure. The aircraft you're not taking the antenna superstructure off that all stays the same the adapter plate unfair.
Things and and how that the whole structures attach the aircraft. So it's a pretty easy conversion.
For those who want to go from Mckay used to K.
That's a new development on our part and and one we think gives us a lot of flexibility with our.
In terms of spectrum use in the future if for some reason K ends up being a.
Preferred band or preferred spectrum by customers and also in the business combination context gives us a lot of flexibility.
Thanks, Okay and.
One last one for me and this is probably for a.
Barry Barry if we assume that you know April represents.
The bottom can you estimate roughly like how much consolidated revenue.
It was was down in April in terms of a ballpark percentage.
Well that was the amount for see a.
So I think probably the just the easiest way to do that as you can look at what a normalized revenue was for the first couple of months of January of this year January February and that that decline that we'd said was on the order 60% to 80% would be reflected in those April members.
I wanted to that model at the top my head, but that would be basically that the foundation for doing that calculation.
On the Sicad and.
And Greg that's just see as I mentioned.
Yeah.
Okay, so when when taking into account.
If we assume like flattish BA.
Should we expect a 50% year over year decline in total consolidated revenue or do you have a ballpark for what we should expect for.
Like the trough year over year decline.
Yeah, you know it's gonna be.
Go ahead.
Yeah, well the one thing I want to remind you lose that these accounts suspensions and planned downgrades will have an impact on BA revenue. We don't have revenue for April yet, but but that'll be down and if you think about you know the 80 GE part of our business and.
Yeah.
The numbers I shared with you wouldn't think of percentages, yeah, you're going to get to something close.
Gotcha and are there.
And now that you've spoken a lot or you mentioned one of.
The international customers.
Not being able to pay or a credit write down what are your expectations for potential credit losses on the business jet side for the rest of the year.
We don't expect to see.
[noise] meaningful credit losses, there you know the the way that subscription business works is over 90% of the I'll have to be a service revenues or from subscription businesses. So and you know the those payments are largely made on credit cards and so so we just see very very little.
I think historically in that case and then there are some of the.
Larger fleet operators for example, when did that are under larger that are under contracts and as we've talked about I think that people are going to want to be using that the business jets, particularly as this because we come out on the Corona virus situation. So we really don't expect to see meaningful credit losses. There. The exposure is on the CA side.
And so as we mentioned that was from one international airline partner that went into administration.
So that we could see more losses, a credit reserves taken.
For on the C.A. side as we go forward if the situation deteriorates, there's the new standard now as you know requires you to assess the.
The situation and to take those losses currently as opposed to waiting until they happen. So some of its based on the assessment. So as we do that assessment now quarterly could be that we would see that those charges taken ended and just to clarify and the CA business. Those charges are both for current receiving.
We'll balances as well as against a contra asset account that sits on the books. So so not only as a write down of Congress to doubles. The part of it is a write down of basically the value that contract overtime.
That makes sense.
Thank you Barry Thanks, everybody.
Thanks.
Thank you.
Concludes our county session at the time I like to turn the call back over to Mr. Oakleaf Dawn, President and CEO of Gogo for closing remarks.
Thanks, all for attending our Q1 2020 earnings call like to finished with a quick summary, if I could.
Your first of all in flight connectivity is not going away because of the Corona crisis. If anything we think passenger adoption will accelerate as more people are connecting online. During this endemic and that they want to stay connected what's in flight when the systemic is over and pandemic is over.
Second we have a three track plan to ensure our long term solvency and drive value for our shareholders. The first track is our operating plan.
Constantly adjusting areas and develop action plans, along our 16 cost levers to hit our objectives.
Subject has been to maintain the minimum weaker leading the liquidity we need to safely operate the company.
To pay the interest doing that and to preserve the strategic franchise value of our two businesses.
We've identified and are implementing 170 million to 330 million of cost savings T. achieved those objectives and are well on our way to doing just that.
Second track as our strategic track.
We believe our business Aviation Division is a very attractive business that can stand on its own and.
And we believe our commercial aviation business is the leading service provider to the commercial aviation industry, and we believe it could bring tremendous value in a vertically or horizontally integrated business combination.
Finally, we have a financing track should the first two tracks fail or not currently pursuing financing. However, we're keeping our eyes open for appropriate opportunities if they arise.
We've applied to the federal government under the cares Act for grant the mines your Mac to the airline industry in airline contractors.
And if we received government assistance, we would reinstate employees that have been furloughed and restore salaries that were reduced last week.
Oh, Thank you for your attention and we look forward to speaking you again in the future and as usual they say thank you [noise].
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Oh.
[music].