Q2 2019 Earnings Call
At this time all participants are in a listen only mode. So if anyone should require assistance during the call. Please press Star then zero on your Touchtone telephone to reach an operator.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, today's conference maybe recorded.
I'd now like to introduce your host for today's conference Mr., Peter Lopez, Vice President of Finance and Investor Relations. Sir. Please go ahead.
Thank you Liz and good afternoon.
Welcome to global Eagle's earnings call for the second quarter of 2019.
Peter Lopez globally, he was vice president of finance and Investor Relations.
I would like to remind you that before.
In our discussion today will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are based on managements current expectations and beliefs and are subject to uncertainty and changes in circumstances.
Actual results may vary materially from those forward looking statements due to various factors that we discussed in our earnings release issued earlier today as well as in our 2018 annual report on Form 10-K .
And our Form 10-Q that we filed today.
We disclaim any obligation.
To update those statements whether as a result of new information future events or otherwise our discussion today will also reference EBITDA adjusted EBITDA and free cash flow.
Which are non-GAAP financial measures. We have included a definition of these non-GAAP financial measures as well as a reconciliation to the most directly comparable GAAP financial measure in the earnings release and in the slide presentation accompanying this webcast.
Now I would like to turn the call over to Josh marks Chief Executive Officer of Global Eagle.
Josh.
Thank you Pete and good afternoon, everyone and thank you for joining our call today, let's start with slide three Pete and I are joined by Christian Mezger, Our CFO and Paran ran or president this as Christians first call as CFO and we're excited to have them on our team. He has hit the ground running and he is making meaningful progress on both cost controls and process improvement.
After my remarks today Christian will provide our financial updates and Perry will be available for Q and eight today as well.
Turning to slide four I'll start today with a review of our business strategy.
Global Eagle is a leader in connected passenger entertainment services, we provide high speed Internet movies like television games advertising and digital media services for Air Sea and land markets.
With expertise across passenger and guest entertainment, we have unparalleled breadth and technical capabilities to serve airliners cruise ships yachts enterprise sites military and government agencies.
And we've built a strong position in our markets in aviation, we are the leading provider of media and entertainment for Seatback systems and wireless IC on single aisle airliners like the Airbus Athree 20, and Boeing 737 families. We are a leading provider of Internet live television and games.
For cruise ships, we are now the largest integrator of Internet and life TV.
However, and wherever passengers travel our entertainment and connectivity enriches their time away from home.
Turning to slide five.
It's obvious that passenger expectations for fast Internet and compelling entertainment our rapidly growing and we put the foundation in place to meet those expectations, we modernized our connectivity network with new technologies that increase throughput, while delivering consistency across aviation and maritime.
We've tested and are now in a position to deploy lower orbit or Leo satellite constellations as they come online.
In parallel we modernize our technology platform for content services, New aircraft feedback Entertainment systems feature for K resolution and personalization.
Global Eagle cloud based content platform called open is uniquely suited to power. These new high definition feedback systems.
It's important to note that feedback market growth continues.
Airlines aren't choosing between feedback I envy and connectivity they want to coordinate IC and connectivity to interact with their passengers to cure rate and deliver content cost effectively and to drive new ancillary revenues.
So our strategy is to connect entertain and inform passengers.
Entertainment is driving connectivity growth as passengers watch embedded videos on social media or bids content from streaming services.
And connectivity systems also create new distribution points for our traditional media business.
Polls, our analytics platform for in flight Entertainment provides meaningful insight about what passengers want to watch when and how in fact analytics enable airlines to drive more efficient and targeted advertising through our internet portals.
Analytics also help airlines identify what content passengers want so they can focus their IP spending.
As we use cloud technology and connectivity to break the monthly content update cycle Airlines will be able to use feedback systems to personalize their passenger experiences with the premium high definition movies.
They can also serve passengers the long tail of content over their high speed connectivity systems. So we are well positioned in both connectivity and seatback entertainment as they converge.
For the past two years, we've been building the technology to meet the future and now to convert our innovation into revenue, we remain focused on execution and customer delivery.
We are ramping our in our installations with air France, our three axis antenna and our high speed modems are delivering the speed and customer experience that we and air France expected.
Given the complexity of in flight connectivity implementation, our delivery on air France, and our other major customers creates a strong reference for sales campaigns.
In media and content Airlines are now live on open our digital.
Platform and will bring additional carriers so the digital platform over the next year.
So by digitizing our delivery open has differentiated global legal against legacy content service providers or C. S piece, that's still operate in an analog world.
So, let's turn to slide six as we progress our product transformation and our delivery we've been focused on operational efficiency.
Our goal is to be a cost leader, while maintaining an open and future proof architecture. So we can bolt on new technologies like Leo satellites as they come online.
We've taken significant cost actions to reduce our cost of sales and our operating expenses.
On our first quarter webcast, we discussed the positive cash flow impact we expected from these actions.
We guided positive cash flow on a sustained basis in the fourth quarter when the Boeing seven 737, Max fleet was back in the air and this quarter's results certainly show we're on the right track.
Ill provide more information on the Max grounding shortly in my business update at Max reactivation is important for sustained positive free cash flow.
But our cost actions are clearly showing in our results as of June Thirtyth, we have achieved about 90% of our targeted savings from our first quarter actions and we see additional cost opportunities across our business.
In the second quarter, we generated record cash flows from operating activities of approximately 12 million.
After capital expenditures, we generated 8 million of free cash flow.
Note that 8 million of free cash flow includes severance cost incurred during the quarter.
Additionally, gross margin and EBITDA improved sequentially inclusive of the negative mix impact.
Our technical differentiation, our delivery expertise and our cost efficiency position us well against key competitors are excuse me against key competitors and with our customers.
So we recognize that access to liquidity is critical.
Putting the company on the right cash flow trajectory created an opportunity for us to work with our first lien term loan lenders.
Last month, we announced a win win deal with these lenders we amended our first lien term loan agreement to generate about $61 million of incremental liquidity consisting of about $35 million of upsizing net of fees and a $26 million reduction in our amortization through 2020.
The proceeds from this transaction are incremental to the approximately $50 million of existing liquidity at second quarter end.
And we used most of the net proceeds to repay our revolver, which is still available for future draws as needed.
Let's now turn to a review of our business.
Our commercial strategy is based on running a healthy core business with strong customer relationships driving profitable growth.
And transforming to be the cost leader in digital innovator in each of our markets.
So, let's turn to slide seven.
The Boeing 737, Maxs grabbing started in March so our second quarter numbers reflected a full quarter impact to connectivity service revenue equipment revenue and margins.
When we held our first quarter webcast in May we had expected the Max to re enter service in August .
Now, we don't expect Max reactivation until December or January .
We have our connectivity systems on Max aircraft at southwest fly Dubai lot Ameritech Mania.
Prior to the grounding we served 26 connected Max aircraft and in addition, our media and content business serves Max aircraft at global carriers.
During the grounding, we're not loading content on those planes or earning royalty revenue southern Max issues will impact both connectivity and media and content revenue as well as our margin across multiple areas of our business for this year.
Turning to equipment revenue, we are a Boeing line fit supplier for the Max program. The substantial majority of our Max installations. This year will come through the Boeing line fit program, where our equipment is installed at the factory.
During the second quarter Boeing delayed delivery dates the first five shipsets, which shifted about $2 million of equipment revenue to the third quarter versus our expectations.
Boeing continues to provide us regular updates on shipment dates and we expect continued to expect an additional 40 to 50 shipset deliveries for Boeing line fit through the end of the year.
If boeing reduced production rates or suspense production for a period of time, we could see shipment dates slip into early 2020.
To summarize when the Max Reenter service will activate several dozen aircraft that are already equipped with our systems.
When this occurs.
We expect about $3 million positive impact in service revenue per quarter, and about 2 million positive EBITDA impact per quarter.
Therefore, Max service revenue is an important factor in our ability to generate sustainable positive free cash flow.
If the Max grounding word to extend into the first half of 2020, it would impact our cash flow generation.
However, we expect to be able to absorb such delays with our accessible liquidity, including the additional liquidity that we raised from our first lien deal.
And in the meantime, we continue to work with our Max airline partners and with Boeing to mitigate costs and to plan for the Max has returned to service.
Now, let's turn to slide eight and discuss our in flight connectivity programs, our air France equipment chipsets and installations continue consistent with our year end target of about 60 aircraft.
We expect to install the remainder of the air France, Athree hundred 20 family fleet by early 2021.
Network and system performance have been strong and last month, we launched live television services.
Air France aircraft now have fronts, 24, TV five months and BBC world programming available.
As we scale, our TV programming across any aid. These services are available for our other airline customers as well.
Our improvements to the passenger user experience also continue.
On our last call, we previewed the rollout of Apple pay as a core part of our passenger portal. This is now active.
Passengers with Apple devices can use biometrics to automate log on and billing as we remove the friction from lock in and payment we create new opportunities for our airline partners upsell other value added services driving new ancillary revenues.
We're also increasing take rates on our system, which in turn improves our advertising and sponsorship opportunities.
In addition to frictionless payment. We're also rolling out new network technologies that allow us to deliver streaming class experiences over legacy networks.
Well our network back on rides on state of the art high throughput satellites. It is critical to maintain coverage and the performance over oceans and remote regions. So we have built proprietary technologies to maintain performance and cost effectiveness when using legacy satellites.
That satellite failures are a fact of life and our network to protect our airlines against the loss of any individual satellite or antenna system.
Our technology is online in Europe , and we've seen terrific passenger response in fact average revenue per aircraft at Norwegian has increased over 10% with material new revenue share generation for our airline partner.
Finally on our last call, we announced that we have been awarded a major connectivity program in the EMEA that will leverage our air France network investments, we have initiated engineering and certification and we hope to announce the deal soon and start installations at the beginning of 2020, we continue to expect that this will become our second largest fleet, serving both Boeing and Airbus single aisle aircraft.
As we build our network and passenger capabilities, we are well positioned and a reputation for delivering on our promises is helping us win competitive campaigns.
Let's turn to slide nine and discuss media and content.
We've now fully implemented our new contract with United Sadia, Vietnam, and Kuwait Airways.
Our newest CSP airline relationships, representing the single largest CSP account in the industry started in July we expect to see that positive impact from the third quarter.
This year, we also expect to see increased seasonality in our content revenue that favors the first and the third quarters because several of our larger contracts are on by monthly deliveries two each in the first and third quarters and one each in the second and fourth.
Turning to content distribution.
Our second quarter revenue was down as we focused our at risk distribution activities on fewer higher quality studio partners. We did not renew an unprofitable studio deal and instead, we are buying all the card is needed. So we can still access the relevant content without risk. This has resulted in lower content distribution revenue, but improved cash flow.
Christian will provide color on what to expect for media and content. This year, we do expect low single digit revenue growth for 2019 with a strong rebound in the third quarter due to revenue timing.
Seasonality in the fourth quarter is expected to be moderated by the major news CSP contract.
Let's turn to slide 10, and cover Maritime enterprise and government, which we call Meg.
Our services to Meg include Wi Fi connectivity global TV broadcasting and equipment for guests cruise remote workers and soldiers.
Last fall, we reset our major cruise contracts to lock in multi year revenue in backlog. These contract changes do impact year over year comparisons through the third quarter of 2019. However, since signing these renewals we've seen better than expected performance as we deliver additional bandwidth and introduce new passenger services.
We finished the second quarter with 121 cruise ships with connectivity 55 of those 121 also have television services.
In addition, we serve 169 vessels with TV only for a total cruise ship count of 290 vessels. We are now the number one integrator and reseller a satellite capacity for the cruise market.
Our TV growth continues as well and we expect that 70% of our crews revenue will be front connectivity with the remainder from television.
As we look at the marketplace, we are seeing a robust pipeline of opportunities ahead of our already contracted growth.
Turning to yachts at quarter end, we served 224 vessels and our active yacht count increased we saw the seasonal revenue recovery that we expected building to our third quarter seasonal peak for this market.
Finally in our enterprise business, we continue to see the final wind down of our cellular backhaul business and in the second quarter, we were impacted by a non paying customer in our Brazil business Christian will provide more detail on our Meg revenue shortly.
Now on our first quarter webcast.
I outlined the strategic review that we're conducting of our mix business.
Responding to inbound interest we have been considering the potential sale of some or all of our Meg vertical.
We retained Barclays to advise us separately, we've been evaluating the potential sale of our joint venture interest and at this time I'll review continues we have seen significant interest in the entire make business as well as in portions of the business from a number of potential buyers. We are evaluating options to maximize shareholder value, which could include a full or partial sale of the business.
While we continue this process. We are pleased to report that the Meg business continues to perform well and we believe it will deliver value to our shareholders, regardless of which path we choose.
We took significant cost actions, which improved our operational efficiency, we structured win win deals with customers and with satellite partners to optimize capacity and increased performance. We are winning key renewals and we're in an excellent position to continue winning in the market. So if we do a transaction we're going to ensure that it's the right answer for our customers for our employees and that it will strengthen and enhance our shareholder value. We now expect our review to conclude by the end of the fall now I'd like to pass the call to Christian to review our financial progress.
Thank you, Josh and good afternoon, everyone.
I will begin by providing my observations first 90 days with the company.
Since I have rival asked me deeply impressed by our attention to serve our customers and win in the marketplace.
Our ability to work with our lenders and provide an additional $61 million in liquidity.
Which combined with cash flow improvements should alleviate liquidity concerns.
Finally, I've been very impressed by our company wide focus on financial discipline.
Which has led to significant improvements in unadjusted and adjusted EBITDA.
As well as free cash flow.
Let's turn to slide 12 to discuss our liquidity profile.
I would like to update you on the amended credit facility with our lender group.
As just detailed a first lien upsizing will provide global eagle $61 million in additional liquidity over the next 18 months.
We are using this liquidity to pay down our revolver and supplement the company's working capital requirements.
Including the crash cash proceeds and after making our quarterly interest payment. We currently have liquidity of $74 million.
Finally, we agreed with our lenders to simplified financial covenants that have been set to be consistent with our estimates of the company's future financial performance.
Turning to our financial results on slide 13.
Global Eagle reported second quarter, 2019 revenues of $157 million.
Revenues fell 5.1% on a year over year basis.
And sequentially revenues were down 5.5%.
To be clear the Max impact was approximately $2 million.
The impact of refresh cycles in content.
Had a 2.6 million dollar impact.
In the non renewal of an unprofitable content distribution contract had an approximately 1.5 million dollar impact.
Together, the total negative impact on revenue in the second quarter was about $6.1 million.
Gross margins for the company were 21.1% up 170 basis points from last quarter.
In a 770 basis points improvement from a low point in the fourth quarter 2018.
As Genie was $48.5 million down 20% year over year and down $3 million from Q1 of this year.
The company successfully executing its phase two savings plan and at this point has realized $23 million year to date and savings which is in line with previous guidance.
I'll discuss our kids cost initiatives in greater detail shortly.
Operating income for the company was negative $15 million, which is a sequential and year over year improvement.
On adjusted EBITDA was $8.7 million almost double the second quarter of 2018.
Adjusted EBITDA has.
Our progress in achieving improved financial results and is an important step towards our stated goal to achieve sustainable free cash flow by the end of 2019.
Note that this was accomplished with the headwinds of the Max grounding and content refresh cycle.
Moving through the PML statement globally of net loss for the second quarter of 2019 was negative $38 million earnings per share of minus 42 cents.
This includes $22 million of accrued interest expense.
Let's turn to our segment results and start with our connectivity segment.
Connectivity revenues increased to $83.5 million or 1% year over year growth.
Despite an approximate 2 million revenue headwind due to the Boeing 737 Maxs grounding.
Our gross margins in connectivity were 20.2% in Q2, 2019 and showed year over year improvement of 300 basis points in sequential improvement of 850 basis points.
In our last webcast, we outlined at gross margin recovery was driven by increasing network utilization.
Technology amortization from HTS satellites, and satellite capacity unit pricing changes.
The second quarter, primarily benefited from the decline in satellite unit prices as we renewed and renegotiated bandwidth contracts.
The year over year benefit for the quarter was approximately $2.8 million.
Network.
Network utilization on the other side did not change significantly this quarter to the next grounding.
As mentioned in previous calls we continue to believe that our total connectivity gross margin should be 25% on a normalized basis.
Obviously this is only achievable once the Boeing 736.
737, Max aircraft returned to service.
This is a good time to talk about the financial impact from the 737 Maxs Groundings on global Eagle.
The Max program negatively impacted second quarter services revenues by approximately $2 million with an approximate 1 million impact to adjusted EBITDA after adding back Ciro point.
$3 million of related expenses.
In both the third and fourth quarter of 2019, we expect the revenue impact of $3 million per quarter, and adjusted EBITDA impact of 2 million per quarter. After Seo paid 3 million of related expenses added back per quarter.
As George mentioned earlier once the Max aircraft returned to normal flight schedules and all next aircraft are activated on our network. We would expect a positive revenue impact of approximately 3 million per quarter.
In an adjusted EBITDA impact of approximately 2 million per quarter.
We expect a positive cash flow impact to be greater than the adjusted EBITDA impact.
Our estimates do not include any material changes in our shipment dates for Boeing line fit Max installations, if Boeing were to suspend Max production, we could see additional delays in equipment revenue.
In a temporary inventory belt impact working capital.
We do not expect Boeing to suspend Max production and our additional liquidity allows us to navigate through a such risks should that arise.
Turning finally to our maritime enterprise and government business, which we call Mac.
Second quarter revenue was $44.1 million, an increase of 2.8 million quarter over quarter, comprising 52.9% of our total connectivity revenue and 28% of our overall company revenue.
Gross revenue was $17.4 million after our crews contract reset in the fourth quarter of 2018, we continue to build revenue ahead of our expectations with strong operational performance.
Turning to yards.
Second quarter Yaki revenue was $6.7 million, an increase of 1.1 million versus the fourth quarter.
Historically, our third quarter has been our seasonal peak for your revenue.
Commercial shipping in energy revenue was $6.3 million, an increase of 1.3 million over the first quarter.
In our enterprise business, we had a second quarter revenue of $10 million a minor decline from the first quarter.
In the first quarter and beyond we shifted a significant Brazilian customer to cash accounting due to payment timing.
Our government revenue was flat at $3.7 million in the quarter with expected growth for the remainder of the year.
Now, let's turn to our media and content segment.
In Q2, 2019, our revenues were $74 million a year over year decline of 11.3%.
And they declined sequentially of 7.4%.
2.6 million of the decline can be attributed to the content refresh cycle of our airline partners and 1.5 million can be attributed to our exit from an unprofitable content distribution contract.
In Q1 2019, most of our customers had to content refresh cycles, whereas they only had one cycle in Q2 2019.
Therefore, we expect CSP revenues to increase in the third quarter.
And finally as Josh mentioned during his remarks, we will see an increase of revenues for this segment from our newest CSP customer relationship the largest and industry.
Our gross margin for the content and media segment in second quarter was 22.2%.
Both a year over year and sequential decline.
This was mainly driven by three items.
Lower revenue levels associated with the timing of content refresh.
Accounting for about 100 basis points.
Increased mix of large CSP contracts that have lower margins accounted for another 100 basis points.
In accrual adjustments that we do not expect to reoccur accounted for approximately four points.
We believe that our gross margins for media and content should be about 1% lower than they have historically been due to the shift in mix.
This leads to a range of 27% to 31%.
Now I'd like to turn back to highlight the progress of our cost saving initiatives, let's turn to slide 14.
First off we are on track.
We continue to deliver cost reductions.
Without negatively impacting our service delivery.
Focusing on gross margin improvement and operating expense reductions.
First our face to head count reductions from February are now largely completed having reduced our annualized labor run rate cost by about $90 million per year.
Over the past year during phase one and phase two we have eliminated 20, VP SVP and EVP positions.
Secondly, we have reduced both professional service expenses and travel and entertainment expenses significantly in the quarter.
On a quarterly run rate basis, we have reduced these expenses by approximately $6.8 million versus the prior year quarter.
We will continue to optimize our cost structure.
Every day, we look for new opportunities to be very efficient.
But also more effective in how we serve our customers.
These efforts should help us to reduce our cost structure not only 2019, but also in 2020 and beyond.
A major factor in reducing cost is the remediation of our material weaknesses.
This program is progressing well.
As you know, we already remediate to material weaknesses.
Now focus to remediate several additional material weaknesses and 2019.
I expect the overall broken to last until 2021, as we design business processes and further integrate and update our ITC system environment.
I will now discuss key balance sheet and cash flow items, we ended the quarter with a cash balance of $11 million in line with our expectations as we target to minimize interest expense related to the usage of our revolver.
Our liquidity at quarter end was approximately $50 million before our first lien amendment.
Cash flows from operating activities was positive $12 million for the quarter and included $1 million of severance payments.
This was a 22 million sequential improvement there was aided by positive working capital trends.
In the second quarter increased collections of accounts receivable and flat accounts payables aided cash flow from operating activities.
Our capital expenditures for the second quarter were $4 million.
Our second quarter Capex is in line with our previously given guidance.
And slightly more than that $20 million of run rate and less capital expenditure.
During the second quarter, we generated record positive cash flow of $8 million.
This is a very important milestone for our company.
We are working to build upon this accomplishment we continue to expect our realignment cost realignment plans together with revenue growth to drive a minimum of $25 million of adjusted EBITDA in the fourth quarter of 2019.
Upon resolution of the Boeing 737 maxs related issues.
We expect to transition to positive free cash flow on a sustainable basis.
To clarify sustainable free cash flow assumes no benefit from working capital.
In summary.
We made good progress over the last two quarters, improving our financial performance by winning new business.
Cutting operating expenses and driving EBITDA improvement leading to positive free cash flow.
Given the headwinds of the Boeing 737, Maxs grounding, we're especially proud of our accomplishments.
Nonetheless, we are focus on continued improvement to drive the business to sustainable positive free cash flow.
I want to thank our employees for their tremendous work, which led to a good quarter that showed measurable progress.
I am excited and proud to be part of this team.
With that I would like to turn it back over to Josh.
Thank you Christian so in the first quarter, we materially improved our earnings but our cash flow was still negative and now in the second quarter. We again improved earnings while also delivering meaningful positive free cash flow for the first time in company history. We did so against material headwinds from the 737, Max we reduced costs, while implementing our new content contracts, including the activation of our major new CSP account. We also transitioned our first airline down to open our cloud based digital content platform, which provides industry leading capabilities for high definition video personalization and scalability.
During the second quarter, we strengthened our team with the appointment of Christian CFO , we're really benefiting from his experience and cost control and process improvement we addressed our long term liquidity through our first lien amendment that we completed in July which clearly demonstrates our strong relationship with our lenders and as we continue our cost actions and deliver on growth. We remain on track for our guidance of 25 million adjusted EBITDA in the fourth quarter once the Max Reenter service, we feel we'll be in position to generate sustainable free cash flow into the future.
In the meantime, we continue our strategic review of our Maritime Enterprise and government business areas, we've seen interest and we're evaluating options to maximize shareholder value, including both a full and partial sale of the business in parallel we'll continue to evaluate our JV interest as well.
And while we continue this review the Meg business is performing well and we believe it will deliver value to our shareholders.
So our actions position global Eagle as the passenger experience partner of choice for Global Airlines cruise lines and other partners I'm very proud of the progress we made in the second quarter and highly confident in our ability to deliver technical innovation, while also improving the efficiency of our cost structure with that I will turn the call back to Pete for QNX.
Thank you Josh Liz we'd now like to open up the call for questions and answers.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your touched on telephone.
If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key.
Again, that's star then one if you'd like to ask a question at this time.
Our first question comes from the line of Greg give us with Northland Securities. Your line is now open.
Good afternoon, guys. Thanks for taking my questions and congrats on reaching.
Positive free cash flow in the quarter.
Thank you.
Further.
So now that we've achieved positive free cash flow, which is a couple of quarters earlier than expected how should we expect that the trend over the next couple of quarters and if you could maybe talk about like thus far in Q3 are you on track with your expectations from savings were on.
With respect to the next round of labor costs professional services lower bandwidth costs.
Et cetera, and I guess has anything really changed with respect to your previous expectations on the timing of those.
Yes, so thanks.
This is Christian so let me first.
Take the first part of your question.
I think we are very happy to have achieved here free cash flow in the quarter.
I think.
As we mentioned multiple times during the prepared remarks, we look for sustainable free cash flow in the future that means that working capital is kind of eliminated from that equation. So we have a little bit to go on that one.
What becomes very clear is that there is a high dependency on the Boeing 737, Maxs grounding and the release of that half the aircraft stack in the Sky back in service.
To to achieve that.
So we feel good about that trajectory I think the company has done a really good job in the quarter to hit this milestone.
But I think there is still work to be done.
In terms of what's going on in the current quarter.
The.
The expectations on how the cost savings flow through in terms of labor TNT bandwidth I think we are fully on track.
We are executing to the plants that we had set out and it's basically a continuation for what we have done here in the previous quarters.
And then lastly, I think.
As I mentioned in my part of the script I think it is now two to become this cost consciousness to be part of the DNA of the company and to continue to reevaluate business processes and so forth to continue savings in the future.
And we will talk at a later point in greater detail about that.
Great Thats really helpful.
And then secondly, I know you can't say too much here, but.
How should we think about your decision to extend the strategic evaluation process to be able to fall I know previously with the end of summer is there anything you can say about more or less interest from potential buyers that you are seeing and maybe has anything changed with respect to.
I guess the process on how you are evaluating strategic alternatives.
I wish we is it safe to assume that you're still seeing a lot of interest in the bag business.
Yes look the Mac business as I said is performing well.
We've put the right platform in place of both technology and cost structure for that business to excel and we're in a market where a number of our competitors are restructuring themselves, which creates a very interesting pipeline of opportunities for us given our track record of delivery as we look forward, we're going to continue to evaluate opportunities for either the full or partial perimeter that business.
Based on what's right for our customers for our employees and of course the shareholders.
At this point in time that review continues.
So no we don't have any further guidance at this time other than our focus is ensuring that this.
Potential transaction would drive value for shareholders.
And we will create a result that is significantly deleveraging for for us that continues to be our focus.
Got it.
Got it and then.
I was just wondering if you could provide some additional color on the rollout of the major IP account that you began the July I think it was at the beginning of July .
But everything really goes plan there and.
How should we see this relationship potentially ramping is there additional room to grow with this customer.
Yeah. This is Pat on.
Thank you for that question. It's a good question, yes, I think we're off to a very very good start of course, we we've replaced another Sci Fi provider here, it's a major accounts.
We because the customer hasn't hasn't really yes wanted us to reveal who they are because they want to do that themselves in a different kind of PR campaign.
But we are off to a very good start it were.
We've delivered the first cycles here, we continue to deliver the next prepare to deliver the next cycle and there.
When that starts to hit the ground running here with the first customers were rolling it out and some of these new ones youre going to see faster cycles, which also means that you're going to not have the.
The cyclicality of the business that Christian talked about in terms of revenue as well. So yes to the question on the new account its going really well, we see an upside with it and yes to that.
Outline of our new technology, that's also going to drive some take some of the cyclicality away, which will be create the sustainability for us on revenue that would also help the cash flow on the.
Great that's really helpful Bear.
And one last one from me would just be if we switched over to the high FC side, the new contract that will begin ramping or I guess begin installing in early 2020.
How should we think about when that will be recognized as revenue and I guess, how many initial installs should we expect on a quarterly basis, if the entire contract because I think you said 113 aircraft to start out with.
Our guidance in terms of the size of the opportunity is it will be our second largest fleet and it's no secret that our largest fleet as southwest.
So that should give you an idea of the scale.
As I've guided is while it does include multiple aircraft types.
So there is some complexity around the ramp up of the installation given that we're dealing with two different.
Manufacturers and families of aircraft.
In terms of the timing as you know we would expect to start rolling out in early 2020.
We have not yet set the final installation timetable with the airline.
That's something that's in process right now as we complete the engineering and preparatory work for the program, but we do think it will have a significant impact on 2020 equipment revenue and then as it as aircraft enter service and our activated.
Will impact service revenue by the back half of the year as well.
Good to hear thanks, congrats on the quarter.
Good.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from the line of Jay Lee with Haven Capital. Your line is now open.
Hey, guys. Thanks for taking the question just a real quick follow up on the 737 Maxs issue going back to the Q4 conference call of 2018, you guys noted that.
Max aircraft represent only about 1% of our total connectivity service revenue now it looks like Thats jumping up near 4%.
What is driving that change and then also on the Q4 call you noted that.
The majority of the Max aircraft from monthly recurring revenue models.
So they're not really dependent on flight segments, operator pass through your sessions as something in that change as well I'm just trying to.
Get a handle on the net impact and how that changed or how that evolved over time.
So the answer to your first question about.
The magnitude of the revenue.
It's driven by the fact continue to install.
Max aircraft during the grounding so over the course of the last couple of quarters at a pretty healthy inflation curve aircraft, which is why we guide that you at this time, we don't expect a significant impact.
Overall the equipment revenue.
As we as we install them access the seer whoever is aircraft are installed.
Boeing is putting those aircraft in short term storage hitting the reactivation of the the fleet. So we from our calculation of service revenue impact in particularly the revenue that will come in when those aircraft service.
Based on a count of aircraft that is increasing every month.
To answer the second.
Andrew can you repeat that there can you repeat the second part.
Well I mean, all the second part was the big chunk of these aircraft were supposed to be on monthly recurring revenue model from assuming that the aircraft were not sold are just sitting and hangers and I get that but then.
Back in Q4, 1% total connectivity service revenue at that point in time was Max aircraft.
Right now that number you said, it's about $3 million a quarter, which is about 3.6% over connectivity revenue.
And Thats just the Delta there is just the equipment.
Yes, so it's when you look at our contracts.
No we are working with our airline partners. This is an extraordinary event.
For all of our airline partners is a regulatory signing of the aircraft and those are covered by different contractual provisions. So the answer to your question without getting into any detail any individual customer contract is.
We are working very closely with our airline partners with Boeing.
But this is an extraordinary event that impacts our ability to collect monthly service revenue at the point when the aircraft are allowed back in the air and has has received.
It's a clearance to fly.
We expect that monthly service revenue to kick back in independent of flight segments operated.
So while they're out or you don't get them monthly recurring revenue.
That's correct.
Okay, and that's baked into the contracts.
You can infer that okay.
Okay, Alright, great Thats, all I had thank you.
Yes.
And again, ladies and gentlemen that is star then one if you'd like to ask a question.
<unk>.
And I would like to turn the call back to Mr. Lopez for closing remarks.
Thank you Liz and thank you all for participating on our second quarter 2019 earnings call. We look forward to updating you on our continued progress next quarter.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect everyone have a great day.