Q2 2020 Gogo Inc Earnings Call
The first track is a covert operative Plan Focus on preserving our liquidity through the end of the pandemic. The second track is a strategic initiative to combine our commercial Aviation division strength is another Enterprise to position the combination for success in the commercial Aviation IFC market and the third is a financial track aimed at dealing with our convertible dead back stopping the first two tracks should we need to do so
for that said let me now turn to The Cove it operating plan now forecasts that we will achieve savings and greater than the high end of the range. We shared on our last call and unless there's another major setback from covid-19.
And on the rest of the world are traffic returning to 44% of 2019 Levels by the end of 2020 and 72% of 2019 Levels by the end of twenty Twenty-One. Now, I'm going to step through each of our 3 segments and share a lot of operating metrics. The pattern will be a bit repetitive. So I apologize but I'm trying to share our pre-code levels where we bottomed out at the bottom of the chasm if you will and then the recovery that we've seen so far. So let me start with our business Aviation division three codes. We average about 3,500 flights a day on April 12th. We hit the bottom of the chasm of 397 flights.
We've you daily slice is an important metric because flight activity drives demand for in-flight connectivity since averaging 793 flights per day for the month of April 9th. Come back with 1,600 flights per day in May $2,500 per day in June twenty $600 in July and up over 2,700 in August. The big issues fourth quarter were a that 22% of our account suspended service and be another 22% downgraded their service plans.
good news
Is that 64% of those that suspended account? So now on suspended and eighty percent of those that have that downgraded plans have now upgraded the best news is that ninety percent of those it suspended or downgraded have moved back to their original plans or higher price plans. Which bodes well for a rebound in our our pool going forward.
We ended the quarter with 5400 aircraft online down from our high of $57 at the end of q1 as we look ahead. We expect a t e d d units online to recover to our prior. Hi and the first half of next year.
With the combination of accounts and paid plans being reinstated and steady growth and aircraft online. We expect service Revenue to begin recovering this quarter and remain on a fairly strong recovery track for the next several quarters.
Atg units shipped in the quarter fell to 100 units from an average of 227 units a quarter last year and we expect unit shipped to grow this quarter of the not to recover the last year's level this year.
On another positive note in the next week or two, we expect to surpass 1005 installed and flying and also surpassed 450,000 flying customer satisfaction with this product has been very high and it is by far the most successful product launch ever.
The longer term we think that covid-19 may actually be a catalyst for the business aviation industry dealers and fractional operators report a huge surge of sales inquiries, which is good news. But we've not yet seen that turned into orders in our order book in our commercial aviation North American segment. We've seen steady growth and passenger traffic since April GPO was averaging $27 billion a month and then collapsed to 1.5 million in April, but then started to recover and came went up to 3.3 Month in May and six million in June.
Flight per day or another good barometer for the health of RCA Market. We were averaging a little more than ten thousand flights a day in a North American segment at the bottom of the chasm in April. We saw a couple days as low as $2,300 flights per day in May we averaged $2,700 in June that go to 3,500 month in July it go to $5,300 and in August were averaging a little more than six thousand flights a day. The good news. Is it over that same period load factors. Also Rose from the 10 to 20% range in April, depending on what airline you're looking at up to the 40 to 60% range this month all of which bodes well for our Q3 gross passenger opportunities.
all of these data points shows
That the c a North American Market is recovery still way off was last year, but it is recovering nonetheless. And that recovery is starting to come through in our numbers starting wage Essence. We were averaging 125,000 sessions a day which then collapsed 91% to 11,000 sessions a day and April coming back with 15,000 a day in May and is now all the way up to $40,000 a day for thirty 2% of freaked over the level in August.
Now I'd like to discuss sales not Revenue because given 606 accounting and other similar factors sales or a better measure of daily cash generating activity than Revenue pre-owned covered North American Sales average just under 1 million dollars per day in May that number collapsed to just under $200,000 a day off in June and July it grew to $275,000 a day and in August. It's running a little more than $300,000 a day.
The downturn in our sales and the recovery are more muted than the session downturn and Recovery because monthly service plans and other recurring Revenue source, which accounted for about 25% of our daily sales pre-clovis are stickier the daily in are sales and account for roughly. I'm sorry and accounted for roughly 25% see a service salesman Creek over time. We ended Q2 with 2,500 aircraft online and see a n a down 25,000 2455 aircraft online and see a n a down twenty-five from the prior quarter but up 12 from prior-year not all those aircraft were active though in the quarter off a low point was roughly 1200 active aircraft per day in early May about two-thirds of which were a TG Regional Jets US Airlines relied heavily and Regional Jets at the bottom of the page.
Because they're cheaper to fly the main line Jets and if no one is on the plane, it doesn't really matter. What jet you use at the end of the quarter. We were up to about 1,500 active tails per day off as of last week. We were up to more than $1,800 or active tails per day or 73% of our North American Fleet.
It's tough to predict the impact of covered under Fleet count going forward because their lines don't always retire all the aircraft. They say they plan to retire but we estimate that they're about 230 older go get installed aircraft that North American Airlines May retire as they downsize their fleets over the coming year or so.
By the quarter and so far into Q3. We have run a little ahead of our forecasts, but we believe our forecast for North America are pretty accurate and give us a good basis for projecting our life.
Nrca, the world segment. The downturn was about the same as the North American segment, but the recovery has been slower. Our rest of world. GTO was running a 11 million passengers per month and that collapsed to $480,000 or 95% in the month of April and May was no better. There was a modest recovery in June being down on the 89% And since that time we have seen more recovery pre covid-19.
Like three-quarters of these flights are domestic flights and non us markets, which is Japan Brazil in Australia.
Load factors in Rome extremely dispersed with higher factors on domestic flights and quite low factors on InterContinental flights.
Positive terms and also starting to come through in our numbers free covid-19. Rest of World Vision was averaging $47,000 a day which collapsed to 94% off 700% in April, but as ground is $6,000 a day in June and they're running at more than $9,000 a day for August.
El Sol the similar pattern is North America running at 114000 a pre-recorded and dropping down 76% to $27,000 a month in April and then started a steady recovery and are now back up to a little more than forty thousand a day in August.
Rest of the world aircraft online actually grew in the nine to eight hundred forty-two and 151 from prior year due to retirements and bankruptcies. We expect roughly a hundred of our current rest of world Fleet be be installed over the next year or so.
Again, these numbers are hard to predict because in this environment Airline Fleet plans can change rapidly.
These be installs will be offset by installations of backlogs which currently stands at 517 aircraft that we consider a hundred and five of those could be at risk due to bankruptcies.
Net-net, we still expect significant growth in our rest of world Fleet over the next several years. So there may be some declines in the short run.
And that's on green shoots. You 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 cost side of our covert operation plan.
The first goal of our plan is to protect the health and safety of our employees and our customers. We've implemented work from home policies and know all of our facilities are now open with extra safety precautions. Only a fraction of employees are actually working from the office at this point in time.
I'm really proud of the great job. Our team has done of working remotely despite furloughs and wrists. They've been stayed connected and worked as a team.
After safety, our next priority was focusing on the Financial Health of go-go and creating value for shareholders approach has been to develop and continually pressure test multiple scenarios of depth and duration of the covid-19 demek in our markets and then develop operating plans to address those scenarios.
The operating plans and turn Drive 16 cost levers that we can pull or push to manage our cash expenses the commercial Aviation market conditions are pretty consistent with the worst case scenario. We've developed back in March and in the business Aviation Market, the dip was much deeper than we anticipated but the recovery has been much faster.
Call before cast a hundred seventy million in Savings in 2020 and 2021 and the best case scenario and 330 million in in the worst case scenario internet acting greater than 300 greater than the 330 million dollars in case savings because we're closer to the worst case scenario out of the 16 rubber plant.
The latest and most significant lever was our announcement two weeks ago of reduction 14% in our Workforce 20% of our commercial airlines Division Workforce that that off 20% of our commercial airlines condition Workforce cuz obviously has been the hardest hit by the pandemic including a tradition since the beginning of the pandemic. We've now reduced headcount and our commercial Aviation a vision by 30% We'd always stated that a riff was our 16th lever and sadly with Airlines and such difficult circumstances, and we had no choice but to move from furloughs to a risk if we were to meet our liquidity requirements.
Pay reductions will continue in our compensation committee has announced that it plans to pay our twenty-twenty bonuses and stock unless the company should have adequate cash reserves to pay in cash.
I won't go through the details of the other lovers again other than to say that virtually every supplier we have is working with us to get through this pandemic and we are very grateful for their help.
We've also had help from some of our Airline Partners who delayed installations are found other ways to help us reduce cash burn.
We tried to minimize the impact of our cost reductions on two levers that our product related our Google 5G initiative and a 2K initiative and know we've shifted some spending around on those may be done cell without affecting timing.
We believe these savings should be adequate to tie to through the sun your days. However, we continually model new scenarios in case this downturn it substantially deeper and longer than our current worst-case projections. We have plans to address those scenarios if need be I want to thanks to go go team for the hard work and creativity. They've displayed in developing these plans and also offer the sacrifice all of them are making to ensure the long-term survival of our company.
I also want to thank those that will believing us be leaving us August 14th. Your departures have nothing to do with your individual knowledge skills or effort. They're driven by circumstances. No one could have predicted and it'll be on all of our control. We wish you the very best in the next stage of your careers.
Now, let me turn to the Strategic track.
As we've said many times in the past. We have two valuable businesses and management views. Our job is realizing the value of both those businesses for our shareholders our business Aviation division operates in a very attractive industry with relatively little customer concentration and underpenetrated market and a strong Market position. We offer the industry-leading product at an attractive price relative to competitive Solutions, and we have unique Advantage due to our proprietary spectrum and ATT Network.
financially
Recurring Revenue model generate strong cash flow which allows us to invest in enhancing our product offerings and maintaining a product Advantage as we did with the launch of our Advanced product line six years ago and has that we will do with GoGo 5G and twenty twenty-one.
RCA business operates in a much more challenging industry with high customer concentration of more heavily penetrated market and a number of competitors.
Everyone agrees that I have seen commercial Aviation is an attractive growth industry airlines are moving to free service or will drive adoption and and airlines are poised to drive more operational applications at the quality of in-flight Broadband grows in the future.
But the IFC but try FC players to capture this attractive growth potential and drive Innovation industry would benefit from fundamental changes through either horizontal or vertical business combinations off.
Recently, we received questions about whether we are in a process to sell our commercial Aviation Division and we'd like to make the following comments in reaction to those inquiries.
We've long talked about the Strategic benefits of combining RCA division, either a with another service provider and driving scale anomic economics or be with a satellite operator of driving utilization economics, or see with an avionics company in facilitating data transfer as a connected aircraft becomes a reality.
Has accelerated consolidation discussions as industry players look to emerge from the crisis of the strongest portfolio of assets. They can to capture future industry growth go go commercial Aviation brings an attractive and unique set of assets to such a combination for both strategic and financial buyers sponsoring such consolidation ideas off. We help create the IFC segment and have established a leading market share with many of the world's leading Airlines. We have industry-leading competencies and Engineering software sales support and NetApp management. We have the leading IFC product in the world and go go to KU and we have an asset-light business model that affords us tremendous flexibility as the satellite industry moved quickly toward a multi orbit multi-spectrum future.
Several parties expressed interest in our see a business in the second quarter and as a result, we retain BDT & Company as our primary advisors and lost a formal formal job this summer to evaluate our strategic options for that business.
Within an extensive discussions with multiple parties and feel optimistic that a deal may happen. However, it cannot be sure that we will be able to consummate a transaction. We do not want to impact our negotiations by saying too much publicly and will not answer questions or comment further at this time and will not be providing regular updates in this matter until it is appropriate to do so. I thought I would add that we've taken steps to facilitate a transaction by completing a series of steps that began two years ago to formally separate our two businesses that started in 2018 when we split business Aviation out organizationally as its own division in 2019 removed r a t g Network and operations under the new business Aviation division, which alone networks with the division that most relied upon that particular Network. So VA manages a TG and see a manager has the satellite Network.
at the beginning of 2020
We split our corporate expense to provide visibility of these costs which help investors Mark Clearly see the value of the two businesses and finally in July. I completed a legal separation of the two businesses by establishing separate balance sheets and segregating assets liabilities contracts licensees and employees by divisions. We are really proud of the commercial Aviation team and the tremendous capabilities. They've built and think it will have a bright future as part of a larger more fully integrated energy.
Now let me finish with the financing track because we can't be sure that we will be able to complete a strategic transaction. And because there's some risk the pandemic will get worse and cause you to fall further not we're not rise as quickly as we projecting our current plans. We are also pursuing a financing track among the factors we need to consider. Is it a $238 billion dollar face convertible notes to come due in May of 2022. We have no firm financial plan at the moment, but believe our three track value creation plan should have for this opportunity to improve our capital structure also is you know, the cares act provides to potential opportunities for growth would receive assistance with $32 billion dollar short term payroll protection package carriers and contractors in the 29 day and loans and Loan guarantees for air carriers including part 145 repair stations. Like go go
We've not factored receiving government assistance into our financial planning. However, we have applied for $81 under the grant program and $150 Under The Loan program.
Well, we have not heard anything definitive on either application. We found a question-and-answer on a recently published Treasury Department frequently asked questions list that would indicate we will not be eligible for a loan program. We can still not received word on whether we will be accepted for the grant program that we do continue conversations with Treasury.
Did we receive government assistance We believe We would be required to roll back all the most of the furloughs and pay reductions that I discussed and pay reductions that I discussed earlier and risk and obviously the phone number any other employee actions until after September 30th was that let me turn it over to Barry to do the numbers.
Thanks Oak. I'll start my comments with a summary of the financial impact of the covid-19 demek on our business as well. As our response. I'll conclude with an overview of the operational results for a ba and see a divisions. Of course. Google has been significantly impacted by covid-19 commercial Aviation has been much harder hit than business Aviation and Thursday is already recovering reasonably. Well.
Consolidated Revenue was down by 48% from the first quarter of this year. See a revenue declined nearly three times as much as be a as see a revenue was down 63% and be a declined 23% over the first quarter.
Bass controls we have already implemented this year are running ahead of plan.
As a result of these actions, we achieved break-even unlevered free cash flow for the quarter and we ended the quarter with $156 in cash.
Let me build on Oaks comments by summarizing the financial dimensions of our response to code.
Described as we outlined on our last earnings call. We are executing on a three-part value-creation plan including the operational track of strategic track and a financing track off covered the Strategic and financial track. So I will focus on the financial implications of our operational planning.
Within the operational track, we continue to follow our three-part planning and execution process developing scenarios, identifying cost-saving levers and am actively monitoring the industry Dynamics to assess where we are on the Continuum of the scenarios.
On our last quarter called we reported that we identified cost savings.
That ranging from $170 to $330 through 2021. We also indicated that the level to which we execute on these plans would depend on how them overnight either impact unfolded relative to our best-case and worst-case scenarios.
You may recall that our worst case scenario contemplated a full ground stop for two to three months. We're not completely at that point, but we are planning for a slow recovery and Commercial application. Which puts us very close to our worst case scenario.
In response to the rapidly evolving code situation we have now developed cost-saving plans in excess of three hundred forty million dollars through 2021. This is above the $330 million. We'd previously cited as the high end of the range of cost savings without we could achieve well, I won't go into each of them in detail. Let me summarize the impact of the phone numbers of our custody splat.
Six out of the 16 levers are non personnel-related and these comprise about two-thirds of our projected savings.
On our last quarterly call we stated that about 3/4 of these cost savings were either directly in our control or represented savings where we had already reached agreement with the requisite counterparties.
We made even more progress since then.
Now as we look to the more than $340 in savings, we've identified through the end of 2021 approximately 95% of these savings have already been secured or off in our control.
The three primary counterparties include Airlines equipment suppliers and centcom providers. We've made significant progress in coming to agreements with our customers and suppliers. Thursday is our customer and we are grateful for their partnership with us as we navigate through this turbulence.
One of the key drivers that cost savings is that we have agreed with our Airline Partners to significantly delay installations.
Pushing out these installations mutually benefits go go and the Airlines and represents very significant cash savings to us between now and the end of 2021.
The time of our first quarter call we had already renegotiated our purchase commitments to align with these installation delays reducing our twenty-twenty expenditures that at least eighty million dollars.
Getting the Ford on the airline proceeds. We would have received for these installations. These delays represented approximately $40 in net cash savings to go go during 2020.
since then we've been able to reduce purchases even further which is reflected in the higher overall cost savings I described
Or satellite providers are also taking a partnership like approach with us. We have now reached agreement with all of them.
These concessions generally don't alter the fundamental long-term structure of the agreement and they typically provide for a re-evaluation of the impact on a rolling basis, but the cash savings on a significant.
Now expect savings through 2021 of over seventy million dollars from the negotiations with that come vendors as well as some delays and purchasing new capacity through to reduce the month. We're also dramatically reducing non-essential Spin and related line items across the board while being mindful of our objective of maintaining the franchise value age.
These expense categories represent over 60 million dollars in savings through 2021.
Unfortunately, our employees are having to share in the pain go but has caused to our business. It's about a third of the cost savings are from personnel-related action.
Well, we put it off as long as possible pending potential Government funding. We were forced to implement a reduction-in-force as an asset the end of July.
We also modified our bonus program to enable the company to pay bonuses in the spring of 2021 in stock. The impact of this change to the plan is reflected in our second quarter numbers.
These cost saving initiatives are already taken hold and in fact are running ahead of plan.
Our best-case and worst-case scenarios had identified cash cost-saving excluding the impact of working capital through June of this year ranging from $58 to $67 respect.
In fact, we achieved over a hundred million dollars in cash savings through June surpassing our worst case planning scenario.
On a combined basis r e d and d sales and marketing and G&A expenses were down 35% versus the prior-year and we're down 27% from the first quarter of this year.
This operational planning track has significantly reduced our burn rate and drove our strong cash flow performance for the quarter.
Yes.
Did the quarter was 156.3 million dollars in cash. This is $58 lower than the two hundred fourteen point two million dollars Equity the first quarter and the difference is holydog to the $53 in interest payments made during the quarter and a repayment of $5 on our abl
this means that on an unlevered basis Google achieved Breakeven free cash flow for the quarter.
We believe this is a significant achievement given how severely we've been impacted by the Covent demek particularly in our commercial Aviation business.
As we look to next year, we will benefit from the full-year impact of the cost savings. We are implementing this year.
Assuming the recovery stays on track and that we continue to execute on our cost savings plan our projections suggest we could approach free cash flow break-even for the for the full year 2012 or on a levered basis that is after paying or interest expense.
I would also note that we are current on our interest payments and are in complete compliance with all of our debt Covenants.
I will now turn to a discussion of our first quarter operating results beginning of the Consolidated level total revenue age ninety six point six million dollars for the second quarter down 55% over the prior year.
Service Revenue. It was 74.3 Million down 57% and Equipment Revenue declined 44% to 22.4 million from the year-ago quarter.
As I mentioned the Top Line performance is very different between B A and c a b a service Revenue declined 20% and there are combined c a n a and c a r o w service off the client 75% over the second quarter of 2019.
Our cost controls helped mute the bottom line impact as we reported adjusted ebitda of -15.9 million dollars.
B as bottom-line performance was particularly impressive as they recorded near-record segment profit margin of 50%
We recorded an additional $5 in credit last reserves under the new Cecil standard predominately related to one airline that went into Administration during the quarter, but there were no other mature asset impairments recorded during the quarter.
This is in contrast to asset impairment charges of forty nine point four million dollars recorded last quarter which reflected the initial impact of covid-19.
Allow discuss the operating results of our business segments starting with business Aviation.
As hoped ba is weathering the co good crisis reasonably. Well particularly on a relative basis.
total
Revenue declined year-over-year by 23% to 54.6 million dollars for this quarter with service revenue and Equipment Revenue declining by 20% and 36% respectively.
Service Revenue through the Cobra. Has exceeded our internal expectations reflecting the less significant impact on the industry versus CA as well as the robustness may be a subscription model.
Well activations exceeded deactivations in June the first time since the beginning of the cobit crisis, we are still seeing a cautiousness in the market around buying you equipment wage are expecting a substantial pick up in VA equipment Revenue by the end of the year from this quarter of low point, but we'll continue to monitor equipment sales closely through both the OEM and aftermarket channels.
Importantly units online decreased a very modest 1% from $5,462 to $5,399 over the prior year and 5.5% from the first quarter. We did see a more substantial 17% year-over-year decline in average monthly service Revenue 480 G-Unit online from 3091 to $2,570 as customers either downgraded their usage plans or shifted to pay as you go plan.
Describe it's gratifying to see these customers largely returning to their plan as they start flying their planes again at more normalized levels.
They did an excellent job in maintaining margins in the face of these Revenue decline segment profit declined 13% to 27% $2 for the quarter. And as I mentioned m a h e v eight fifty percent profit. Margin, this was within one per-cent of b as all-time high of 51% which was achieved in the first quarter of this year.
This bottom-line performance was driven by a 69% overall gross margin for the quarter and tight expense control.
Combined E D and D sales and marketing and G&A expenses were ten point nine million dollars a 30% decrease over the same period last year.
This reduction in operating expenses was despite investing five million dollars more for the development of Google 5G this quarter versus the prior-year quarter to a portion of this incremental investment was raised now, let's turn to a discussion of our commercial Aviation division results starting with C A North America.
C a n a very substantial declines in Revenue with total revenue declining 72% to Thirty million dollars and service Revenue declining 74% to 25.5 million.
This is primarily due to the impact of covid-19. Revenue was also modestly impacted by the changes with American Airlines. We have discussed on previous calls.
Equipment Revenue declined 52% year-over-year to 4.5 million dollars primarily due to not installing any to KU aircraft under the airline directed business model this quarter off a significant drop in service Revenue resulted in service gross margin declining from 60% in the year-ago quarter to 40% this quarter.
Revenue decline also drove a swing in reportable segments profit from a 34.1 million dollar profit a year ago to a ten point six million dollar loss in the second quarter of this year.
Aggressive cost control is a very important part of the c a story c a n a z d and d sales and marketing and G&A expenses were reduced in aggregate by about 47% from the second quarter of last year.
Aircraft online increased modestly to $2,455 from $2,433 a year ago. This was driven by an increase in to KU and RJR Craft on life partially offset by the removal of older main line and RJ aircraft and a small number of to KU retirements.
As you would expect the arpa numbers for see a parallel the revenue declined given the reduced load factors on the aircraft that are still flying.
C a n a r p was down 73% from 136000 a year ago to $37,000 in the second quarter of this year.
Well, we can't predict the impact of the code prices on Cas revenues with any certainty. We do expect can a service Revenue to grow meaningfully in the second half from this devastating levels that we experienced this quarter.
Now, let's turn our attention to c a r o w.
Total c a r o w Revenue decreased to $12 down 67% from the second quarter of 2019 service Revenue decreased to 4.7 million down 69% from the comfortable. This was the result of lower Arco which of course reflects the impact of covid-19.
Equipment Revenue decreased the 7.3 million dollars down 49% from the year-ago quarter primarily due to fewer installations under the airline directed model as a c a n a this reflects our push out of installations with our Airline Partners across the board.
Reported segment loss expanded by 63% to twenty six point seven million dollars from the second quarter of last year due to declining Revenue.
This loss was meaning to a muted by the significant reduction in e d and d and sales and marketing expenses. Which parallel those in c a n a
i would point out that the additional credit loss reserved. I mentioned previously a recorded and see a DNA which resulted in an increase in this expense category from a year ago.
C a r o w aircraft online increased to $842 at the end of the second quarter up 22% from 691 in the second quarter of last year. We exited this month with 622 KU planes and backlog and eighty 3% of that backlog is attributable to c a r o w.
Cuz I conclude my prepared remarks. I want to emphatically reaffirm our commitment to successfully steering go go through these challenging times.
Of course the impact of the pandemic on the aviation aviation industry has been dramatic but we have worked very hard to bring an objective perspective to the situation with the cheating on our 16 levers to achieve the cost reductions. We've recorded to date and will continue to tightly manage our cost structure as dependent it persist and we will press forward with the injector consolidation opportunities. We have discussed.
Finally, I want to join okay and thanking our employees for the incredible commitment and work ethic you have demonstrated through these challenging times. You are truly are inspiration. Thank you again operator. We're now ready for our first question.
Thank you, as a reminder to ask a question. You will need to press * then 1 on your touchtone telephone to withdraw your question from the queue, please press the pound key. Please stand by what we can pause and a roster.
First question comes from Scottsdale with Ross Capital Caroline. It's not open. Hey, good morning. Thanks for taking my question Oak and Barry. Thanks for the detail. Very helpful. Appreciate the the execution you guys have had in a very very difficult environment. Maybe first it just in terms of the Strategic process. I was wondering if a joint venture outcome is something that's amenable and something that's actually on the table and you mentioned separating the balance sheets as well. I was wondering if you could provide any color on that front in terms of the debt levels or if any debt level that would assume to be going with the CIA side and Thursday to follow up on on T A and B A.
Yeah, I mean, we're not going to comment Scott on the potential forms of combinations this time. Like I said, we're not going to answer further questions on that in terms of the debt though that stays off at you know, remain KO at the parent level. That would not be going with see a gotcha and just to follow up on the North American gross margins front a lot better than I think people were expecting. It sounds like you've been very successful in terms of your renegotiation with your satcom providers, but could you dig in a little bit more in detail in terms of what maybe the fixed or variable component is if there were any one-time benefit is this kind of a base case minimum of what we should expect in Gross margins going forward given given really a difficult top-line environment in the second quarter.
Yes got it will be take that one. You know, the the kinds of cost reductions that we have seen.
Are clearly part of our plan and we will see the benefit of those going forward, you know, particularly as we converted those furloughs to reductions in force. We will see that benefit going forward. So and that applies across the sea a North America and the world segment that we did see as I mentioned the negative impact on g a p r o w segment from the Cecil from the Cecil reserves, but in general we expect to see the the the two benefits continue to go forward. So the benefit of using our absolute level of operating expenses as well as seeing the the benefit from the reductions of the Comcast as I mentioned these satcom cost reductions that we have been able to negotiate in package ship with the providers are generally reviewed on a rolling basis. So, you know, they don't want to get too far out over their skis until they see how the code price is going to unfold but they have been very partnership like wage.
And so we expect that to to continue in the in the month in the next several quarters great and and lastly just quickly on you gave a lot of color there. It sounds like from a rep re activations re-upping a plans that you're kind of getting back into 90% plus kind of run rate of where be had been on the services front but surprised to see as well. You're continuing to Thursday see new aircraft coming online. I'm wondering are you seeing demand out there for new aircraft ramping up or is this execution against the existing backlog that it kind of been building up with a d s b and I'm kind of wondering how that long-term pipeline is looking. Thanks so much. Yeah, I mean what a flow is is way down. Like I said, we shipped a hundred and two versus an average if I think about 275 order last year and we don't expect to get back up to that 270 level this year, but we do think we'll have, you know higher levels of orders in or shipments rather than Thursday.
Thank you for so and I think that you know these kind of froze and Q2, especially, you know in the April, you know Actually March April. So if you run late do you want you to bring you to time frame, you know people froze orders are starting to open up a little bit. So we do see, you know, we do see new installs. We don't see the level. Like I said a last year we did see a lot of interest in factional a lot of demand for Charter and we not but, you know, we haven't seen that flow through yet as as new Authors that area as I said my script great. Thank you.
Thank you or next question comes from Lance Vuitton's with Colin. Your line is now open. Hi guys. Thanks for taking the questions. I just have to if I could I know you talked a little bit about this on the back of remarks, but obviously a great job on cash flow in the second quarter, but to what extent do we expect the benefits there to perhaps reverse in Q3 or Q4? And and then I guess to the extent that you don't expect any reversal in the in the back half of the year to what extent would you expect it as the business ultimately result. In other words. Are you going to have to start making good on you know deferrals for you know for Broadband capacity and and and the like
I plan.
Yes, I mean just to be clear our plans run through when we talk about our short-term kind of Kobe block of Twenty-One. And I think I I gave them the call, you know expectations for for the recovery of air traffic by then Thursday. And so, you know, we don't have we're trying to push if we're deferring anything at all. It's out past the end of the pandemic. That's the that's the punch line of what I was going to say. You want to talk with my detail on your question about kind of the near-term and then the longer term cash flow Labs know we do we have really enjoyed the the benefit in the first choice this year from the expense reductions and also working Capital Management. So so that working Capital Management. You can't expect that to continue so we would expect the Dead
You'll be unlevered free cash flow to you know, not be at this break-even level for the balance of the year. We expect that to to be negative for the rest of the year. But when I look at age twenty Twenty-One is we talked about you see the benefit of these cost actions that we're implementing this year or take hold and get the full year benefit next year. That's why we see, you know, moving in to meaningfully positive unlevered free cash flow in 2021 and approaching Break Even free cash flow including as a payment of our interest expense in 2021. So it's really wage the combination of some object in the on the revenue side of the house and then the the ongoing benefit and the full-year benefit of the cost savings actions that we're taking this year off.
Okay, and and you're prepared remarks, you mentioned the 6% converts to May of 2022. I suppose in a perfect world. You have them refinanced by May of 2021 so they wouldn't go current but if I remember correctly the old convertible notes went current for a period of time and the world didn't end. So give them the trajectory of the recovery that you're supposed to do. I would imagine you know, this is a situation in which you would want to wait as long as possible to refinance those notes. No.
Well our, I think it's really important to point out that the value creation plan that we described with the three tracks creates a lot of optionality to address the converts, you know, the Strategic track, you know successful see a sales process is one example of the ways that value creation process could contribute to this optionality. They'd be operations track and the cost savings resulting from that put us in a strong position and and probably adds to our options and making the business more financeable and but our objective is generally to address the converts before they go Kerr in May of 2021. But as you point out it's not a completely right line and you know, the last convert went current for two months. So and then we're able to you know, very successfully refinance with that and the whole balance sheet at that point in time. So so that's our general thought process and the objective but as you point out if it's not a bright-line what I'm going, correct
Okay. Thanks again.
Thank you. And our next question comes from Louis De Palma with William Blair. Your line is now open.
Burien will good morning. How you doing doing? Okay When taking into account the the splitting of the same division with the be a division, do you have a high-level Sense on what the cash burn for the c a division was in in 2019?
Barry yeah on a on an unlevered basis the cash burn for see a 2019 for the full Olive. CA was about 24 million dollars. Sounds good. Yeah, that's what I was I was looking for as you know, you guys are looking to to sell this, you know division whoever acquires it would probably also take into account the cash burn. So I was wondering what the month and cost per that would be and secondly also related to the the c a division SpaceX has been aggressively launching satellites investing in what seems to be KU Band Satellite Internet and previously you guys touted your your to KU antenna. Yep.
As having the ability to connect to the book Geo and Leo satellites and you also recently announced that you conducted a a trial connecting thumb your to KU terminal 221 webs Leo constellation. So I was wondering is it also possible that the two k u system would be compatible with SpaceX is starlink as well. Yeah, it would be Louis. I mean, I think we are well-positioned for any type of non geostationary satellites because we also have the ability to convert from 2 to 2 Ka and and that will fly under Ka Leo's just as well as 2K. You will under k u e
Sounds good. And one final one how much cat facts and and general spend remains for the the 80 g 5G network name. You said you spent a little bit this quarter and I think you spent a little bit in the past as well.
Yeah, as you may recall Louis that took go ahead and just going to say the you know, the total cost of the network is a hundred million dollars about two-thirds of that is capet about a third of that is objects. We are keeping the opposite spend on track. So the development process itself is is a very much on track. So we have three major vendors there and the Cisco cores installed but the antenna prototypes from first RF I've been received and the in the board layouts complete so that that element is very much on track the major part of the capital spend starts in twenty Twenty-One as we deploy the towers and that was about fifty million dollars. It was projected in 2012 or so. We can defer that if for as required, you know, it's large of discretionary, but we do think it's important to keep that program on track, but it's also again not wage.
Binary kind of decision because we can roll out.
Looks like to deploy that Network and then add additional cell sites as required for the capacity. But to get the initial coverage you obviously don't have to roll out the full Network. So I bought a 2021 is the major year of that investment. Sounds good. Thanks guys for taking my questions.
Thanks Louis.
Thank you or next question comes with Rick Prentice with Raymond James. Your line is now open this morning guys. I hope you your family employees are making it through this crisis safely say that you're addressing that the first question. Obviously you took the time to break out the VA from CA between the organization and you'll be a last year if there was a sale sub-ca how much revenue would need to be sent from CA to be a since be a is handling all the 80 G network. In other words. I don't think there's any a limit corporate eliminations right now, but one would assume there would be some some billing from be a to see a for that support.
That's right. There be a commercial agreement between the two companies and you know exactly what that would be is obviously going to be a subject of negotiation between us and the potential partner. Is that something that you'd wait for the partnership to be in place as opposed to putting a contract in place before then?
I think it's a pretty important term for any transaction Rick. So yeah, it would I think everybody would want that in place before I need deal and I think he's probably know there is there's currently a transfer price mechanism in place that VA charges to see a for the 8tg based megabyte that it delivers.
And and how much does that run? Do you I don't remember the number right now.
I don't believe we disclose that publicly. We can Circle back with you. And on the The Next Gen 5 g a t g Network. When do you have to make a decision on on the spending as you watch the recovery of hopefully of of the different segments out there particularly is already recovering is it that took the Strategic decision made first or when when does he need to get the Greenlight to kind of move into the next spending phase that would be you know a middle of next year probably wreck. So you've got you got some room off.
I know you don't want to talk about the the Strategic transaction possibilities, but did I hear you? Say kind of a summertime process in your prepared remarks?
yeah, we have we have some inbound early in the second quarter and
and we watch the formal process in the second quarter, which is continuing now on the 3rd.
And to find one for me is on the cares sounded like based on the frequently asked questions. You might not be eligible for the loan, but you might still be on the birth. When do you expect to get further Clarity on if that eighty 1 million dollar Grant item and then the employee effect would actually hurt. Well, you know exactly we haven't formally been told anything on the loan program. We're just gleaning it from a fact that's been posted. You know, we have some discussions going on right now with truck and we'll see where they lead. I really couldn't predict, you know anything wreck around that it's just it's been very unpredictable. So
You know frankly, I I just be stabbing the dark to give you any kind of time frame obviously should be before September 30th because September 30th is past the whole point of these programs is kind of over so dead, right, right. Okay. Well appreciate that extra color. Good luck as we continue making it through these difficult times. All right. Thanks a lot. Thank you. And what's wrong Jimmy? Let's make this or last question understood. Our next question comes with JPMorgan your line is now open.
I guess thanks following up on a couple of things. So if if CA was sold does the investment in 5G make sense at the levels that will I will will be using
Yeah, absolutely. The you know people's expectations for the performance of in-flight connectivity are going to grow as they get better performance in their home or office environments. And so if you get there's two grade disparity between what they get in flight and what they get elsewhere, you're you're making yourself vulnerable to a new competitors coming in or new technology. So yeah, we think it's important to go through these kind of generational upgrades of the system in in the in performance improvements.
And then a business that's going to be a business. It's also going to be an important investment to make as they drive capacity and if we if it starts free as well and demand more performance, okay?
And then thinking about a a c a deal, you know, we've got rest of the world looks like it's not going to grow from the next few years. You just did a pretty substantial layoffs are these things off in the preparation of doing some kind of deal and making the the asset more attractive or could some of these things be reversed if you if you did a combination?
Reduction in force is really part of our top rating plan. And you know our what we need to do to make sure we hit the middle minimum liquidity requirements we have for the business, you know to get through the pandemic I would that is not really related to any kind of strategic transaction. I didn't really follow your question as pertained to the rest of the world. Yeah. I mean you said yes, it's going to be losing money for the next couple of years. But where were you guys like the it sounds like the planes under under contract wasn't really going to be groomed for the next few years either between potential bankruptcies of customers D installs and and a slower install pace. Is that right? No, I think we said there's about a hundred of the planes that are flying today or installed today that may go away and then we've got about five hundred plus in backlog. They're still of those dead.
Backlog hundred could be at risk because of their blond airlines that are in bankruptcies. However, that doesn't always mean they don't install them. And so that's that's a that's a risk factor and even if you lost all those and noted it out, we'd still be up more than 300 going forward.
Okay, and the last thing you know assuming the the ca was sold or spun out is be a large enough to remain a public stand-alone company or should that be sold or taken private as well?
We don't have any plans around that right now. I'll say this. I've been CEO of much smaller public company, so you can be three or four hundred million dollar public company wage. Um, and uh, you know, obviously we would hope to grow that business also, so, you know, no plans around that at this time Phil, just you know, we'll see what we what the box like when we get there. Yeah. Thanks Luke. Thank you. Thank you, and I'm showing no further questions in the queue at this time. I'd like to turn the call back to Oakley Thornburg closing remarks.
Thank you very much.
So thank you very much for attending our Q2 earnings call. I'd like to finish by summarizing a few key points. First of all in-flight connectivity is not going away because of the corona crisis. If anything we think passenger adoption will accelerate in the future as more airlines offer free service and does the pandemic drives more people to be connected and stay connected second job market is recovering quickly and the commercial Aviation Market is recovering though at a slower pace.
Based on relatively conservative traffic assumptions. We are on track with the cost reductions. We think we need to make to survive this pandemic and forth as we've discussed. We have a formal process under way to combine a commercial Aviation division into a larger Enterprise that we can't be sure of a complete that transaction. We're pleased with our progress today. Thank you for your attention, and we look forward to speaking to you again in the near future as usual. Stay safe.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.
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