Q2 2019 Earnings Call
Ladies and gentlemen, please standby your conference will begin momentarily.
Thank you for your patience and please standby.
At this time, all participants on a listen only mode.
Later, well conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance. Please press Star then zero on your Touchtone telephone.
I would now like to introduce your host for today's conference will Davis, Vice President of Investor Relations.
Mr. Davis.
Please proceed.
Thank you and good morning, everyone. Welcome to Gogos second quarter 2019 earnings Conference call. Joining me today to talk about our results are hopefully Thorne president and CEO .
Very Rowan executive Vice 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 and the future financial performance of the company.
We caution you to consider the risk factors that could cause actual results.
To differ materially from those in the forward looking statements on this conference call.
These risk factors are described in our press release filed this morning.
And are more fully detailed under the 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 the date of this conference call is August eight 2019.
[laughter] any forward looking statements that we make today are based on assumptions as of this date, we undertake no obligation to update these statements as a result of new information or future events.
During the call, we will present, both GAAP and non-GAAP financial measures.
We include a reconciliation explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our.
Second quarter earnings press release.
This call is being broadcast on the Internet and available on the Investor Relations section of Gogos website at IR Dot go go Air Dot Com.
The earnings press release is also available on the website.
After management comments, we will host a Q and a session with the financial community only.
It is now my great pleasure to turn the call over to hopefully.
Thanks will.
We're pleased to announce a very strong quarter exceeding our own revenue adjusted EBITDA and cash flow expectations.
Quarterly service revenue grew in all three business segments and reached $174 million up 9% over Q2 2018.
Adjusted EBITDA, except exceeded our expectations and grew to $37.8 million.
A 100% over the prior year period.
Driven mostly by service revenue and IBP related cost savings.
There are also a couple of quote unquote, good guy that helped adjusted EBITDA in the quarter and I'll describe those in just a minute.
Free cash flow also exceeded expectations at negative 3 million in the quarter.
This negative 35 million in the year ago quarter, and negative 37 million for the first half 2019 versus negative 144 million in the first half a year ago.
[laughter].
Im very proud of my Gogo teammates for delivering such a great quarter.
We worked hard together over the past year to improve our operations and achieve our financial goals.
And we're on track with both so thank you very much.
I'm going to quickly touch on strategic developments, and then dive into the quarter.
I'll leave the heavy number lifting to Barry.
As I look ahead I feel very good about where we are strategically as I said before.
Our model is to grow as demand for in flight connectivity gross I think that demand is poised for accelerating growth as airlines increasingly look at providing free I see the passengers and as the aviation Echo system looks for cheaper and faster ways to access operational data.
A key enabler of our ability to scale to meet this demand on our satellite network is our open architecture asset light operating model.
And key enablers of our ability to scale in the 80 G. world, our proprietary spectrum, and our 80, g. infrastructure, which can provide redundancy and cost savings as we deploy gogo fiveg.
Turning back to satellite today, we were at the tall satellite providers and use 30 satellites to create a seamless global network.
Because we use multiple satellites from multiple operators and operate in the K you ban where there are some 200 communication satellites.
We can layer capacity, where it's needed because 80% of the world's air traffic flies over only 20% of your surface.
We can provide more redundancies in close K constellations, which is especially important given the increasing risks posed to satellites by space debris.
And we can scale as demand grows with the provision of free in flight Wi Fi.
[laughter] today Gogo supports two airlines, providing free Wi Fi to passengers.
In May Delta conducted two weeks of market tests on 55 daily flights to K equipped aircraft.
And in the quarter, we made substantial progress on our plans to ramp up operational support for airlines to provide free Wi Fi to passengers.
A key benefit of our asset light model is that we have the flexibility to move to new higher quality lower cost technologies as they come along in the future.
Towards that end, we're working with satellite partners in several new technologies.
We're working with the Geo operator on a satellite specifically designed for Aero mobility and more specifically for efficient utilization with our two k. you antenna.
We're working with other satellite operators on smaller more versatile software defined satellites, they could vastly enhanced capacity utilization.
And we're working with future Leo providers to see if we could potentially play their networks to enhance latency and reduce costs.
Given our position as a leading provider of broadband in flight connectivity and given the inflight connectivity is one of the fastest growing markets for the satellite industry. We feel we are very well positioned to partner with satellite companies as they develop these new technologies.
On the AG front.
We made substantial progress.
Yes, and our Gogo fiveg product in the quarter.
We're partnering with a leading U.S. fiveg solutions provider and are nearing the completion of the system design phase of the project.
We will be building, our network and the latest Fiveg technology.
And be able to deliver higher throughput and lower latency for a better passenger experience then our potential competitive 80, G. A then other potential pay TG products.
We're starting to talk about Fiveg to airlines for their regional fleets.
And talk to business aviation owners operators and dealers about fiveg for their aircraft and were getting a very positive response.
We remain on track to deliver this product in 2021.
I'm very excited about the value we can create for our company and our partners.
So now let me turn to the quarter. This was our fourth straight beat and raise quarter and our second highest ever adjusted EBITDA quarter, which has led us to raise adjusted EBITDA EBITDA guidance once again.
The biggest drivers of Overperformance, we're improving service revenue at CA M&A.
Continued cost improvement from our IBP plans.
And lower than anticipated sat com expenses as a result of more efficient network management.
As I mentioned before we did have two good guys in the quarter.
First we had a we had guided to a much lower second quarter adjusted EBITDA, partly because we anticipated American airlines and concluding its shift to the airline directed model at the end of Q1.
As it turned out that got delayed until the end of Q2 and resulted in an above forecast $7.5 million contribution to Q2 adjusted EBITDA.
Second good Guy was associated with the renewal of our contract with American Airlines, which resulted in an additional revenue and adjusted EBITDA benefit to the quarter of $5.1 million.
We will not have the benefit of those $12.6 million in good guys going forward.
Q2 was our second quarter of positive combined T I, a and a and wrote a segment profit.
And the second <unk> quarter of positive service margin and CA rest of world.
We made significant progress in reducing our cash burn in the quarter.
And are reiterating our guidance for at least a 100 million dollar improvement in free cash flow for the year.
Despite having an extra interest payment in the year and still expect to produce meaningful positive free cash flow in 2021.
In the quarter, we also refinanced our $690 million senior notes and $162 million convertible stop which pushed the majority of our maturities out to 2024 and has improved our strategic flexibility.
We plan to supplement our liquidity with a $30 million revolver, which fiery will discuss in a moment.
Given our improving free cash flow trajectory in our improved maturity schedule, we do not expect to need new capital to finance, our operations or our strategic investments before reaching positive free cash flow for the year and 2021.
I do want to be cautious about Q3 and Q4 however.
As we will not get the benefit of the good guys as I mentioned a moment ago.
We will begin to ramp sat com spend is more two k. you aircraft come online.
As usage grows and as we ramp in anticipation of significantly more demand at 2020.
And we expect to incur increased investments in key programs like line fit and go about fiveg in the second half.
I'll leave it to Barry to discuss how these trends are impacting numbers.
Now, let me turn to the business segments.
Starting with some comments on the combined D.A. segments, and then diving into a rest of world and in a separately.
Service revenue growth was strong in our commercial airline segment and we are now guiding towards the high end of our prior revenue guidance for both segments.
Take rates also grew in both segments over the prior year and the combined profit to the CIA segments were positive and ahead of expectations for the second quarter in a row. Despite the de installs.
In fact this was the first quarter since the de installs began in earnest a year ago that we had growth of aircraft online in the quarter and because those de de installs have now been completed we expect growth in aircraft online to continue throughout our forecast period.
At the end of the quarter, we had more than 1202 K. you aircraft online.
A net increase of 109, and we had a total fleet of 3134 commercial aircraft online an increase of 81 over the end of Q1.
Even though we installed more than 100 aircraft two k. you our backlog held steady at approximately 900 aircraft as existing airlines added to their orders.
61% of our two K. backlog is in rest of world and represents a great growth potential and 39% is in North America and predominantly represent upgrades from May TG that we believe can create an opera <unk> an opera growth opportunity.
We also had some positive developments in contracts in the quarter Thibeault will renew their contract for a year and as I mentioned earlier American Airlines a renewed their two k. you contract that was expiring in September .
Now, let me comment on the Boeing 737, Maxs situation, we've been able to complete seven installations.
We still have 12 in our installation schedule, including one line fit.
And weve removed eight from our installation schedule for this year.
In total we have a backlog of 36 matches, which includes seven install because we do not count new aircraft as online until it is producing revenue.
The bigger impact has been the airlines holding back on other aircraft that were in our install schedule.
As they need to use those aircraft to fill in for Max is that they cannot fly.
Obviously, our Max installation in line fit schedule could be at risk depending on decisions by Boeing the FAA and airlines and those are out of our control.
In other OEM developments.
Service Bulletin installations on the 7879 continue at Boeing.
No on the Athree hundred 30, Athree hundred 50, and Athree Eightys at Airbus.
Line fit on the Athree hundred Twentyneo family continues on plan for first line fit installation mid next year.
The quarter, we had new indications on the Alaska Airlines 737, 800, and the Cafe Triple seven 300.
Despite the Max we're on track to meet our prior guidance of adding 400 to 475, two K. you aircraft online this year, but this could be at risk for my earlier comment about the impact of the Max.
We're excited about the pension potential of our CA business for a couple of reasons first global wireless usage usage trends are solid and improving.
And will drive demand for free Wi Fi on aircraft.
Second.
The addressable market is large and relatively untapped the only about 35% of the aircraft globally installed with a broadband IC product today.
We believe it will be 18000, new or retrofit aircrafts installed with brown broadband over the next decade.
Now, let me turn to CA North America installs briefly we had 92 gross additions up 50%.
61 in Q1.
But down 17% from 111 in Q2, 2018, which was an unusually strong gross addition quarter.
Net additions that is net of de installs were up 31 for the quarter.
Versus down 139 for Q1 and down 31 for Q2 2018.
I'm going to leave the impact of those installs on revenue for Barry to cover just a second.
Now, let me turn to the CA rest of World installs.
Where we again had a strong quarter with 50 gross additions versus 55 for Q1 this year.
And 47 for Q2 2018.
Compared to this quarter, we expect <unk> revenue to grow both the Q3 and Q4 of this year.
I'll add that I didn't give a de install number for ROE because that's a very minimal.
We are we are focused on driving the profitability in our rest of world segment by installing our backlog.
Ramping ARPA.
Reducing program cost his line fit programs are completed.
Better utilizing sat com capacity overtime.
Now, let me turn to our business aviation segment.
But results were not as strong as we anticipated due to lower equipment revenue as a result of the impact of Epay Ats be installation mandates on our dealer channel.
Outside of equipment revenue, we had a very good quarter experiencing record service revenue record 80 G. ARPU.
In record 80, G. aircraft online.
As a result of the equipment shortfall blowing 2019 revenue guidance for BA to $290 million to $300 million from our beginning of the year guidance of $310 million to $320 million.
Despite our equipment sales shortfall be a TG pine count grew to 5462.
542 aircraft or 11% from Q2 2018.
An increase to 104, an increase by 114 aircraft or 2% from Q1 this year.
So let me dig into the equipment revenue issue and a little more detail.
We shipped 180 680 units in Q2 this year versus 281 in Q2 2018.
Some of which can be attributed to a very tough comp last year. Shortly after our advanced product was launched and we had a very large backlog to fill due to pent up demand.
But we also Miss judge the impact of 80, SB, So let's talk about that for a moment.
Yes, the stands for automatic dependent surveillance broadcast.
As an end is an initiative the essay launched a decade ago to improve air traffic safety.
And it requires aircraft owners to install ats be equipment by the end of this year.
Despite the mandate being out for 10 years, many owners procrastinated and the Mros on dealers are now pact of planes trying to complete the installed by year end.
These installs are both crowding budgets for value FC and also literally crowding out shop floor space as dealers are booked with installations.
No aircraft must be installed by the end of the year under the mandate. We believe that many will lapse into next year crowding shop floors through Q2.
Our view of what is happening with NTSB installs is confirmed by other companies with exposure to the B a aftermarket.
Last quarter. We also expressed some concern about the OEM channel. However, we are seeing a recovery a recovery there and feel that we should be back on track by year end.
In fact, so far six Oems have initiated line fit for our new advanced product and three more in the process of doing so.
On the advance a activation front, we're up to 629 L. Five customers and 254 L three customers activated and billing.
34% of those customers purchasing streaming plans.
We remain excited about the opportunity in business aviation it represents a large unpenetrated market.
We have an exciting new product pipeline.
And it provides a resilient recurring service revenue stream with low fixed costs from our proprietary TG network.
So let me conclude my comments by saying that with the exception of the Ats be issue, we had a very strong first half.
Half of Accenture that center weighted by a few good guys.
But even without those it was very positive and position us well for Reaccelerating growth next year.
With that I'll turn it over to Barry to do the numbers.
Thanks <unk>.
Before reviewing our detailed operating results I'd like to highlight our financial accomplishments for the quarter.
Adjusted EBITDA of $37.8 million approximately matched last quarter's $38 million the best in the company's history and it was well ahead of our expectations.
Each of our three business segments posted gains in service revenue for the quarter and this revenue performance was complemented on the cost side of the business through operational execution and satcom efficiencies.
We are again, raising adjusted EBITDA guidance on this call the midpoint of our new guidance implies 55% growth in adjusted EBITDA for the year.
Gogos cash flow and therefore, our cash position is also running well ahead of plan.
For the first six months of 2019, Unlevered free cash flow improved by $144 million versus the same period last year and was positive for the third consecutive quarter.
We're projecting unlevered free cash flow to be positive for the full year 2019, and we are on target to improve free cash flow by at least $100 million over 2018.
This is a particularly important achievement considering that our net cash interest expense for the year will be $40 million higher and 2019 versus 2018.
Primarily due to making three interest payments on our senior secured debt during the year due to the timing of our refinancing.
This improved cash flow performance is the result of the very strong adjusted EBITDA performance achieved during the first half of the year and improvements in net working capital.
Well our cash position is ahead of plan, we want to ensure that we have ample buffer capital to support the business.
As we previously disclosed the indenture for our 2024 senior secured notes gives us the flexibility to enter into a $30 million revolving line of credit.
With an additional $30 million available based on future performance and leverage covenants.
We are in the final stages of negotiating the principal terms of the 30 million dollar asset based revolver and anticipate completing the transaction within the next few weeks.
Well, we expect to have the facility in place by the end of the third quarter, we do not plan to draw on it at closing.
Including this facility and with our cash position well ahead of plan. We are forecasting a minimum total liquidity balance of at least a $100 million throughout our planning horizon.
And we continue to target achieving meaningfully positive annual free cash flow in 2021.
Based on our current plans and projected cash flow trajectory, we do not anticipate requiring additional capital except as needed to refinance our debt maturing in 2022 and 2024.
I will now turn to a discussion of our second quarter operating results beginning at the consolidated level.
Total consolidated revenue was $213.7 million for the quarter down 6% from a year ago due to lower equipment revenue.
Total service revenue grew 9% to 173.7 million as we saw growth from all three business segments. Despite the impact of the American Airlines the installations.
Our near record adjusted EBITDA of $37.8 million was driven by strong service revenue growth lower operating expenses and lower than expected satcom costs.
I'd like to provide some context for the way, we see adjusted EBITDA playing out for the first and second halves of 2019.
As you know we had achieved exceptionally strong adjusted EBITDA for the first half of this year totaling $76 million, which substantially exceeded our expectations.
These results include the benefit of nonrecurring revenue from two different airline partners in both the first and second quarters with the accompanying adjusted EBITDA benefit Oak described for the second quarter.
As we look to the second half of the year, we're projecting increases in satcom spend to support growing usage as well as planned expense increases for key programs such as line fit and Fiveg.
These factors contribute to our expectation of lower adjusted EBITDA for the second half as implied by our guidance.
We continue to expect the momentum we are building this year to carry into strong adjusted EBITDA and cash flow improvements in 2020.
Now, let's move to a discussion of the business segments, starting with commercial aviation.
For C.N., a and C. Aro W. combined aircraft online increased from 3053 to 3134 sequentially.
As I mentioned this represents the first increase in AOL for the combined segments since the second quarter of 2018 as net aircraft additions in both CA and.
C N and Aro W offset the plan to de installations, which were completed during this quarter.
With the de installs now behind US, we expect to AOL for CA, and a and C.R.W. combined to grow for the balance of this year and for at least the next couple of years as we install our backlog and achieve new airline wins.
Again on a combined basis, CA and a and C. O W achieved modestly positive segment profit for the second quarter in a row due to both stronger service revenue and lower non satcom expenses.
We continue to expect to reduce our functional expenses, which exclude satcom for these two segments, where approximately $45 million this year.
This represents 60% of the $75 million in annual savings that we expected by 2020.
And we are on track to achieve this targeted cost structure.
Importantly, our lower than expected Satcom expense is the result of greater network efficiencies achieved through the deployment of new technologies, and our increasingly sophisticated network management capabilities.
With the growth in service revenue and the benefits of operating leverage on this reducing cost structure. The combined to bottom line performance I've seen a and C. R. W is accelerating ahead of our expectations as I've described.
Turning now to CA anyway.
Total revenue for CA and eight in the second quarter was $105.7 million a decline of 12% from the prior year period wholly due to lower equipment revenue.
Service revenue increased to $96.4 million up 1% from the prior year period, Despite the American airlines the inflation.
Because the second quarter results include the benefits. We've described we are projecting CA and a service revenue to decline and reach a flat bottom in the second half now that the de installs are behind us.
[noise] equipment revenue of $9.3 million was up from $4 million in the first quarter, but down from $24 million a year ago.
This was due to lower total two k., you installations and a shift in the mix of installations from the airline directed model. So the turnkey model, that's compared to the second quarter of 2018.
Take rates and see a increased to 12.7% versus 11.2% in the prior year, a 14% improvement.
Net annualized ARPA increased to $136000 from 113000, a year ago.
Which reflects the second quarter revenue benefits we've described.
Excluding these positive impacts ARPA would've grown modestly year over year.
Consistent with our expectations for service revenue, we expect ARPU to decline in the third quarter.
CA and a segment profit increased to $24.2 million modestly above the $23.5 million.
Dollar previous record achieved in the first quarter of this year.
And a significantly exceeding our internal expectations.
The primary drivers of this outperformance includes stronger service revenue lower than expected satcom expense and reduced operations expenses, resulting from the IBP programs, we initiated last summer.
Now, let's turn our attention to see Aro W, which delivered total revenue of 36.7 million up 9% year over year.
Service revenue grew 49% to $22.6 million driven by an increase in aircraft online.
We anticipate continuing strong service revenue growth in our W. As we install the roughly 560 planes in backlog.
Equipment revenue was up modestly from the first quarter, but declined 23% to $14.1 million from $18.5 million a year ago.
We completed more installations in our W than a year ago, but the shift in mix from the airline directed model to the turnkey model resulted in lower equipment revenue being recognized.
You'll recall that equipment revenue is based on the number of installations done under the airline directed model.
We were particularly pleased with the increase in take rate Aro W. delivered for the quarter as it was despite the higher percentage of aircraft online from new airlines, which more than doubled from 21% in Q2, 2018% to 46% this quarter.
Take rates for our W grew from 13.2% to 13.5%, reflecting a 16.1% take rate per season to airlines and an 8.6% take rate for new Airlines.
Importantly, annualized gross ARPA grew year over year for both seasoned and new Airlines.
Gross ARPA for this quarter was $209000 for the season Airlines and $85000 for New Airlines.
In the aggregate gross ARPO was essentially flat sequentially again and achievement given the growing mix of aircraft from New Airlines.
[noise] segment loss in Cerro W. improved 29% from negative 24.5 million to negative $17.3 million versus a year ago as we benefited from continuing improvement in satcom utilization lower opex from our IBP initiatives and operating leverage.
Now I will turn to a discussion of our BA Division.
Total revenue for BA was down 4% to $71.2 million as a result of lower eightg equipment shipments.
Service revenue increased to $54.8 million up 14% from Q2, 2018, while equipment revenue decreased 37% quarter over quarter.
You'll recall that BA had particularly strong equipment revenue in 2018 up 34% over the prior year on the strength of the advanced platform, which was introduced last year.
This year slowdown comes on the heels of meeting the strong pent up demand for that product, which is the most successful new product launch in VA is history.
The softer performance versus expectations is largely attributable to the timing delays due to 80 SB Oak described.
We highlighted this issue last quarter and expect it to continue through the first half of next year.
HPG aircraft online grew 11% over the prior year and ARPU grew over 2% year over year.
The segment profit decreased to $31.3 million, primarily due to the decline in equipment shipments.
Segment margin of 44% remains healthy despite the revenue shortfall and is in line with the expectations we have set.
Due to a higher mix of service revenue and strong cost management by the be 18.
Segment profit of $64.8 million for the first half of the year is down from $69 million for the first half of last year.
While we are managing the expenses carefully in light of the softer equipment revenue, we are continuing to invest in new products and technology, including the exciting Fiveg network, we announced in June .
In spite of these investments we expect to be a segment profit to be higher in the second half of this year than it was during the first half based on our expectation of increased revenue.
I'll now turn to a discussion of our 2019 guidance.
Totally total consolidated revenue in the range of 800 million to $850 million is unchanged.
We expect to see a in a revenue to be at the high end of the previously provided range of $355 million to $380 million with approximately 5% from equipment revenue.
We also expect C.R.W. revenue to be at the high end of the previously provided range of $135 million to $150 million.
However, we expect approximately 40% of revenue to be from equipment versus the guidance of 30%. We had previously provided.
We are decreasing our BA revenue guidance to $290 million to $300 million versus our prior guidance of $310 million to $320 million based on the reasons we have discussed.
We are raising our adjusted EBITDA guidance to a range of 105 million to $115 million.
This is an increase from the $90 million to $105 million, we provided on our last earnings call and up from the guidance of $75 million to $95 million. We provided on our fourth quarter 2018 earnings call in February .
We remain on track to achieve at least a 100 million dollar improvement in free cash flow versus 2018.
Again this is despite absorbing additional net cash interest payments of $40 million during 2019.
Finally, we maintain our estimate for an increase of 400 to 475 to pay you aircraft online.
As Doug mentioned, we continue to monitor the M pack. The 737 Mats program delays may have on our installations.
Before opening the call up for today I want to take a moment to join Hogan and thanking all the team at Gogo for their talent and dedication.
It's because of their relentless focus on execution that we are able to continue delivering quality service to our customers and financial results for our shareholders.
Operator, we're now ready for our first question.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key again that is star then one if he would like to ask a question.
Our first question comes from the line of Ric Prentiss with Raymond James Your line is now open.
Thanks, Good morning, guys.
Good morning, Hey, direct.
Good thanks.
[noise], obviously encouraging news on the take rates.
Both.
On a and C or a W.
Where do you think that heads obviously previously you had what we thought was pretty conservative expectations on take rates, but.
You also mentioned you have two airlines.
On free Delta did their travel, but what are your thoughts on how we should view the demand side of this equation kind of on the take rate side.
Yeah, I mean that.
Obviously that moved to free will drive take rates.
Up dramatically.
Our take rate today.
He has.
Blends of.
Both.
Paid browsing sessions crate.
Streaming sessions and free messaging in it.
You know that if things go free free messaging kind of goes away and we expect a very large jump in the browse sessions and potentially jump in streaming sessions. So you know, it's it's an order of magnitude larger Rick.
We see 30% take rates on fleet free fleets in Asia, right now and.
They could be a higher in North America, where there are longer routes.
Yeah, I think obviously yeah go ahead.
I was just kind of.
Kind of do a double click on that Rick if you look at take rates under the steady state model with two K. you being installed.
It's a little bit different in North America versus R.W. as we described a bit in North America as to can you gets more fully installed we do expect to see.
Those take rates improving over time.
As that capacity grows and its not constrained and Aro W. There is this kind of combination effect of seasoned airlines.
New Airlines and as I mentioned that the.
Theres quite a disparity almost two x. between the current take rates for the new airlines versus the the seasoned airlines, but we do expect those take rates for the newer lines to grow pretty significantly up as they get season to approximate what we're seeing for the take rates overall in that part of the world.
That makes sense and then on the cost side.
We were obviously pleasantly surprised by the Satcom costs you called it out a couple of times on the call, but how how should we think about modeling that that's probably the hardest ones I found to model.
For you guys and as we think about the take rates going up how you manage that cost side. So how should we think about the satcom cost going forward. Besides just what you mentioned for the second half 19.
Yeah. So I think theres. The first it's important to kind of underscore what is going on structurally here. We are seeing the benefits of the technologies in the network management that we're putting in place that does.
Drive less sat com requirement than is than we had previously expected. So that's a that's a good thing we see that continuing in terms of how to model that going forward.
Clearly sat com expense will grow as usage grows.
There are a couple of drivers of that.
One is that we do see absolute levels of pricing per megahertz coming down around the world. We see that has been true historically and we expect that to be the case.
And as.
We also see ourselves getting better utilization in satcom, particularly in rest of world as you know we have it.
As both a a coverage requirement on men of capacity required for satcom. So we do have worldwide coverage and as we put more planes flying in that network. We will see as we have already a significant benefit in improved satcom utilization.
But as that as those plans get added then you will add capacity as it comes along so I think well the way to think about that is that.
Well, we see margin data margins.
Generally north of 50% in North America, the cost in rest of world continued to be higher but we'll see.
Efficiencies over time from that but those data margins.
I will only grow as we see that better efficiency and.
Reducing cost, but not not to that level and in the short term that North American C.
Okay, and I'm glad to hear you're making progress on the Fiveg Nexgen TG pick a U.S. provider you mentioned a couple of times that thered be some higher costs, how should we think about the costs of that fiveg impacting 19, and 20, both on Opex and Capex.
Yes on the spin starts it's started now a bit it's in the order of a few million dollars for the back end of this year.
It's the spend ramps during the course of next year it is comprehended.
And the guidance that we have given.
In terms of the Capex side, it's comparable to on an aggregate basis to what we had laid out before for the.
The LTE based network.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Phil Cusick with JP Morgan. Your line is now open.
Yes, a couple of follow ups there from bretts questions first year. So gogo five G. you have a solutions provider is that the vendor that you'll use.
And how many sites do you envision kick off.
Yes, yes.
Yes, you know in our business, we it's a fairly specialized business. So when we develop a new.
A new network, we can't buy things off the shelf, we have to actually design the equipment with our vendors. So.
We are partnered with the American United States based.
Fiveg, it's common infrastructure company in designing and developing.
The radios and antennas et cetera.
For the for the new system. So.
Like Weve been partner you know in Detroit with DTC in the past, we now have you known American vendor in that role.
In terms of towers.
Trying to remember if we thought 200 bearing that aren't 50 to 200 150 to 200, yeah. When we rolled out and then grow as required from there.
And a lot of those towers will probably be the same as we use today for AG network. So we'll get some synergies there because we've already got shed some generators and and things like that obviously, we will be paying more rented those towers, because we'll be taking more space.
But the but there are some cost synergies in the network rollout.
Good can you give us any any sort of results from the Delta limited trials, how did speeds holdup, what did you see in terms of capacity issues.
Well the trial was really aimed at market acceptance of free it wasn't meant to test our system.
You know going to feel free.
We obviously have things we need to to grow like our satellite capacity and other things to be able to really provide provision that.
So in terms of how the test went from a market perspective, I think that's that's question Delta should answer.
You know.
Hi, there.
Is there relative to announce what they are doing with the free Wi Fi and it's our job to support them operationally, so I'll leave it at that.
Okay, and then lastly, any update on how you think about the strategic and competitive ecosystem.
For inflight broadband globally, what are you seeing in terms of both demand and then what do you think from your competitors. Thanks.
In terms of demand.
We see the trend of three Wi Fi will derive a tremendous amount of demand and I think that.
Well actually be good for our industry.
Our industry has been.
Kind of the dog everybody likes to kick for a couple of years.
But.
With demand growing I think we'll have a lot of growth industry wide.
You know theres been always a lot of speculation about.
Some consolidation in our industry I think that that speculation continues.
Most recently of Inmarsat going private which I think in partnering with Panasonic I think that that's an indicator of a type of.
Of consolidation and I think we expect that there will be more consolidation are there may be so we want to.
Being a very strong position to play a role in that if it happens.
Just to clarify anything happening on the RFP shot.
We've seen a kind of a freeze on new new airlines for quite a while.
Yeah. There are lots of RFP is there aren't many awards [laughter] so.
You know we are seeing a lot of RFP.
And you know we're deep into some processes that we've literally been working on since I got here before I got here. So we hope to be able to conclude those but nothing to report at this time.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Simon Flannery with Morgan Stanley . Your line is now open.
Thank you. This is lane in park on for Simon.
Just wanted to touch back on on the Delta Free trials are you able to comment on any sense of the timeline there for.
And also when decision or any price.
Future trials would have already been said.
And then secondarily are you can you comment on any ongoing strategic discussions around potential investments or transactions.
On that front.
We are.
I'll start with the second question right now we're really focused on.
Operationally supporting airlines.
Commenting what delta is doing with freeway Osprey IC.
Alright, Thank you very much.
Thank you. Our next question comes from the line of Louie Dipalma with William Blair. Your line is now open.
Good morning, Oak, Barry and well.
How are you doing.
[laughter] not bad what are the engineering challenges for Gogo has two k. you system to offer free Wi Fi at.
Such a large scale that it's never been done before with 98% availability and are there are necessary.
Hardware modifications or is the formula as simple as.
Increasing capacity via.
Purchasing more bandwidth from your partners Fcs and Intelsat.
Well, we've actually got 12 partners, but yeah, that's yeah Louise I mean, the good news about to get used to it we sold it as future proofing. It really is future proof.
So the ramp up on the aircraft for our two K. you aircraft is very minimal.
On the satellite capacity in satellite capacity, yes, we have to ramp up satellite capacity that's for sure.
The other good thing about the two K. you antenna.
You talked about it being future proof.
We.
Thanks, Dan It is very conducive to future technologies like Leo's et cetera, so as those kinds of technologies come online will be well positioned to serve our airlines with lower latency lower cost et cetera.
So you don't see any like technology impediments is just a question of like you spending more money its just.
Our money question and the Money's. There then you can offer the free Wi Fi at scale.
Yep, that's basically right we are making some software improvements in terms of portals and things like that that all have to change. When you go to free I mean, you don't need to get to guys persons credit card number anymore and things like that so there's some software development involved but that's relatively minimal.
Okay and on the business jet side Youve talked a lot about the.
Hey, D S b.
Creating a.
Constraint would you expect.
Hey, TG antenna shipments to be up next year relative to this depressed 2019 number or is it too early to say right now.
Well I think we expect there to be.
Some crowding of the aftermarket channel through second quarter.
We've looked at the numbers of Jets that are still not installed with 80 SB. We expect some of those will never be installed they'll just be retired but we do expect.
Uh huh.
Set of those still come in next year to get installed and that we think in talking to the dealers and arrows and they expect to still be installing a fair amount of 80 SP equipment through Q1 and Q2 so.
You know I think that will still impact our equipment sales going into the year, but we expect it will pick up again in the second half and in total for the year low we do expect the equipment revenue to kind of.
We had a crop this year relative to 2018, and then pick back up again in 2020.
Gotcha and.
A more broader question Gogo shares traded down sharply by.
Over 30% from like $6 over the past two months going into this earnings report you guys probably noticed we think there was concern that your.
Record first quarter.
EBITDA performance was a fluke and with your leverage it would magnify weak second quarter results instead you doubled.
The EBITDA consensus expectations.
But can you talk about.
After the strong first half of the year how.
Your improved visibility like may or may not allow you to.
Invest into.
What I would refer to as discretionary projects such as like the five G and like flat panel phase the raised with phase or and.
It's been speculated you're working on like a tail mounted business jet antenna with Gilad and like do you.
Feel comfortable in your liquidity to do these discretionary projects now despite the fact that.
The stock market seems to be doubting you.
Yeah, well stock market hates us we know that but.
No. We are projections include our strategic investments like Fiveg.
Phased array antenna is yes, we've made an investment phase over the edge.
You know we believe in the assays at some point, we're not talking about the timing of those.
We have not officially announced it a tail mounted antenna for the BA market, but we have a vendor who seems to have announced that prematurely. We hope that means that they will deliver the product prematurely.
The.
So yes, those are all contemplated in our current cash flow guidance and now I'll turn it over to Barry to get a little more detail on the numbers.
Yes. So were you know keeping the pedal to the metal on Fiveg and those other initiatives.
The as I said are continuing to make those investments we think it's important to maintaining the A's market position. Then you know ultimate financial performance. So so we are still pressing forward on those were very pleased to see the first half obviously come in with a.
Level of EBITDA that it is that we're also just being cautious as we provide guidance for next year. There are some known things we talked about so these good guys in the first half of the year on the revenue side that translate into the EBITDA benefit.
Those will not persist we are planning on ramping some of these expenses like we talked about.
In satcom and in Opex to cover these strategic investments, but having said that within the guidance that we have of $105 million to $150 million is solid EBITDA outperformance from 55% growth again at the midpoint and we see that momentum continuing into 2020, I think thats. The important point here and we realize that we've had to.
Dig ourselves out of a hole in the last 15 months or so on the heels of the icing crisis and you know as we've talked about on the last call.
We've got knock those off one by one and we're in a much much different place now and we think have the foundation laid in showing up in the financial performance performance gives us confidence about really being being able to deliver on the kinds of increases in EBITDA that we've talked about.
Sounds good thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Greg Davis.
Sure Steve Your line is now open.
Good morning, guys. Thanks for taking my questions and congratulations on the quarter.
First in the past you've talked about using beamforming technologies to more efficiently utilize capacity.
Really, allowing you to reduce satellite leasing cost by quite a bit could you provide some additional color on the timing of when we might see those occurred given expenses or satcom expenses are expected to grow in the near term.
Yeah, well, obviously, there's a couple of types of Beamforming technologies, where more and more moving to high throughput satellites, which are K U satellites with.
Spot beams as opposed to wide beam.
And that is helping our efficiency now we've also talked about software defined beams.
And you know more dynamically programmable satellites.
Those are out there I would say in the 2023 and beyond.
That's that's technology that will did as you know pretty well design, but it needs to obviously be manufactured and launched and there are some some technological hurdles that need to be overcome in terms of modem technology and other things for that too.
Become meaningful.
And then.
The third type of beam, forming technology, we talked about is in our fiveg product and.
On the in the TG World, where that will use up beam, forming technology to the intangible point more directly at an aircraft as opposed to broadcasting a large funnel like our current eightg product doesn't that that will roll out in 2021.
And I think Greg to your question on the.
The increase in Satcom expense, yes, we we of course are projecting increases in satcom expense, but thats driven by significant increases in usage as we add more planes and take rates increase that we've described.
The the level of growth in that expense is muted by the kinds of things, we're talking about high throughput satellites raw bandwidth costs coming down a better utilization through the kinds of network management capabilities, we have.
Right. Okay. That's helpful.
And then second as we think about ARPA into rest of World segment.
And you talked about how the percentage of aircraft online that are in new fleet is expected to grow from maybe now until year end.
You talked about new fleets being a little bit more reluctant to market. There is the until the entire fleet is installed because that kind of mean, we should expect or bone and the rest of world to slide lower through year end.
Well, yes, you have the certainly the concept right, which is that you have this kind of blended ARPA that as a result of.
The difference that's more than two x. between the the seasoned aircraft and the new aircraft.
If you look at that over time.
Over the last.
Couple of years that.
Gross ARPA has.
Seeing that impact what's happening more recently is that.
You look at this year versus last year. For example, we're seeing improvement in in blended ARPU overall, but we see that kind of staying.
You know relatively.
Flattish as you go forward, we see it coming up in the back half of this year, but I wouldn't count on big improvements in that.
In that blended rate of ARPA until we get these newer planes installed at lease fleets excuse me a newer fleet installed and seasoned for the New Airlines, but then you really see the benefit of that.
Got it that makes sense and last quick one for me.
Why do we see take rates declined sequentially in CA and on the rest of world side.
That's seasonal.
And relatively a typical.
Okay fair enough. Thank you.
Thank you. Our next question comes from the line of Lance.
Well its hands on with Cowen Your line is now open.
Hi, Thanks, guys.
Nice quarter.
Just to pick up where we left off the last question on the on the ARPU being flat sequentially is.
As the new planes are coming online and that's offsetting the growth from the planes that are already season, then what would you say, though is the underlying ARPA trend here, if we think about.
On a like for like basis for those season plans.
I mean is it up low single digits mid single digits high single digits.
For the for the season fine.
Yes.
Yes, yes, so I mean its up.
In the second quarter as I mentioned it was 16.1%.
In the year ago quarter. It was 14.5%. So it's up since then and so we see that.
We've seen that trend growth so.
And I'm sorry in the in the rest of World segment.
Those were the numbers.
Correct wasn't that what you are asking about yeah, yeah, yeah, Yeah, no thats great.
Were you asking about take rates.
No no no no that's right you that thank you.
But speaking of take rates. So you know given the trend toward airline directed and free.
I'm not sure take rates are enough to really measure the progress and I'm wondering if how you think about that seems like we should be thinking also about I don't know duration or duration of usage or or megs per flight or something like that.
Do you have any thoughts there I mean, what other metrics are you looking at to gauge usage and what can you share with us.
Yeah, I mean, I agree with you that take rates compared to today are going to be kind of meaningless, they're going to be up they're going to be a lot higher.
And the way we look at this in very simple terms as your volume is going to we think explode with free unit costs will come down.
Pricing, rather will come down obviously.
But there will be more than offset by the growth in volume.
And produce.
Solid revenue for growth for us in value for us.
Okay. So on the satcom cost side and I apologize if I missed this too, but I heard Barry obviously the unit costs are falling but can we what would you say is going on with the rate of that decline I mean, our cost declines accelerating or decelerating today and given your outlook for increased global capacity.
What do you expect over the next few years.
Yeah, I mean, we're doing deals right now.
Yet.
And continually declining costs on the sat com side.
And we see them in the forward as we look sort of at the forward market. If you will.
Falling pretty dramatically over the next couple of years.
The there's a lot of supply coming on in the 20, 324 timeframe, which we think will further depressed pricing. So I think that is a long term trend and sat com is going to be continually declining in pricing and in at our side will be focus much more on continuing to make efficient use of megahertz appropriately and bringing bringing our capacity utilization up so all of those trends should be on a unit basis driving sat com costs down.
Okay. Thanks, very much guys.
Thanks Lance.
Okay. That's.
All right well. Thank you very much for attending our Q2 2019 earnings call and I'd like to leave you with a couple of thoughts before we go.
First we have a very strong cash flow generating business in BA.
Not only does it have a unique competitive advantage by virtue of our spectrum ownership, but it also has ample runway for growth.
Because the BA market is relatively unpenetrated.
Second.
The rest of World is growing it's also an extremely large unpenetrated market and with our global toolkit you platform, our progress on line fit and our strong backlog.
We are well positioned to win our share of that attractive market.
Sure.
CA North America will bottom out in the second half of this year the impact of American Airlines de installs in their conversion to the airline directed model will finally be behind us.
Fourth we strengthened our balance sheet, given ourselves strategic flexibility by refinancing our $162 million convertible stub in our $690 million senior notes.
Pushing those maturities out until 2024.
And finally by virtue of our industry, leading market share in our asset light operating model, we are well positioned to take advantage of the opportunities that I. Just described we look forward to demonstrating this to you in future quarters. Thank you for your time this morning.
Joining us for our quarterly phone thanks again.
Thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.