Gogo Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 GoGo, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentations, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, to Mr. Will Davis, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Dylan, and good morning, everyone. Welcome to GOGO's first quarter 2020 earnings conference call. Joining me today to talk about our results are Oakley Thorne, President and CEO, Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events 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 the conference call. These risk factors are described in our press release file this morning. and are more fully detailed under the captioned risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 11, 2020. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligations to update these statements as a result of new information or future events. During the call, we'll present both GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings press release. This call is being broadcast on the Internet and available on the investor relations section of the GoGo website at ir.gogair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.

Thanks, Will, and good morning, everyone. I'm not going to spend a lot of time on Q1 2020 as people are far more focused on our response to COVID-19 than they are on the quarter. But I am going to steal a little Charles Dickens to put the quarter in perspective. That is that Q1 was definitely a tale of two quarters. It was the best of times in January and February and close to the worst of times in March. I would say it was close to the worst of times because only April was worse. We finished February... the head on service revenue, gross profit, EBITDA, and free cash flow. And while we managed to still exceed our EBITDA and free cash flow targets for the quarter, we finished behind plan on service revenue, equipment revenue, and gross profit. I'm going to leave most of the numbers to Barry, but share a few that demonstrate the drop-off in our March business. Excuse me. In our CA North American segment, service revenue averaged $28 million per month in January and February, then fell 35% to $18 million in March. ARPA fell 36% from January and February to March, and gross passenger opportunity fell 18%. In our CA Rector World segment, aircraft online grew 30% over prior year for the quarter, But despite that, gross passenger opportunity fell 25% in March. And in our business aviation segment, daily flights dropped 27% from the month of January, February to the month of March. The drumbeat of week-over-week steady declines began in Asia in late February, but by mid-March was in full effect in the U.S. and rest of the world and carried through April. Only now in May do we see some green shoots with a big increase in BA flights per day and encouraging increases in CA passenger traffic and daily sales. In these troubled times, we're laser focused on our liquidity and long-term solvency. And towards those ends, we've developed a three-track plan of attack. An operating track focused on medium-term liquidity. Strategic track aimed at realizing the value of our two businesses and a financing track aimed at backstopping the first two tracks should we need it. So let me talk about those three tracks in more detail, starting with the operating track. The impact of COVID on our markets has been profound. There's been a litany of bad news coming out of the airlines, OEMs, and the travel industry generally. In the commercial airline market, TSA reports that U.S. air travelers were down 95% in April from 2019 levels. IATA projected global airline revenues will be down $314 billion, or 55% this year versus last. The Coronavirus Flight Cancellation Tracker reports that of the 193 airlines it monitors around the world, 105 weren't even flying at all at the end of April. and Sirium, a consulting firm that tracked aircraft, estimated that nearly 17,000 of the world's 26,000 commercial aircraft were grounded at some point in the month of April. In the business aviation market, there's also been a big impact. Business aviation market research firm WingX, which tracks business aircraft flights around the world, reported that business aviation flights were down 80% in April versus prior year. So the car funding impact in GoGo has also been dramatic. In April, our commercial aviation segment's flight counts were down 73% versus prior year. Because there were very few passengers on those planes, session counts were down 91%, and sales were down 66%. The reason sales are not down as much as sessions is because we have subscription plans and monthly revenue guarantees from some airlines. We also saw a significant impact on our business aviation flights, with April average flights per day down 78% versus prior year, and a decrease of 90% from prior year at the low point on April 12th. Because of the dramatic reduction in flights, many aircraft owners, this is in BA, parked their aircraft in the March-April timeframe, and approximately 30% of our 5700 ATG accounts took some action to reduce their spending with GOGO, including 940 account suspensions and more than 750 service plan downgrades. This will have a negative impact on Q2 revenue, but the magnitude of that impact can't be determined until we see the rate of reinstatements. All that said, It looks like we bottomed out in mid to late April and now are seeing green shoots in both our businesses. So there is some cause for optimism. In our commercial aviation division, though still way below last year, TSA passenger counts last week were up 70% from the lowest week in April. For the first time since early March, our flight counts were up for the week. In fact, until last week, We had not had a single day when the flight count was up from prior week. And last week, we were up six out of seven days. Also last week, for the 10 airlines that feed us daily data, we saw passenger counts up 70% from our low point in mid-April. And also last week, daily in-air sales, now that doesn't include service plans or revenue guarantees, were up 40% over the prior week. Granted, that's off a very low base, but hopefully it indicates the beginning of a rebound. In BA, the green shoots are more pronounced, with average daily flights last week up more than 200% from the low point in mid-April and up a little more than 60% over the April average. We're also starting to see suspended accounts reactivated, with 218 reactivations as of last Friday, are at 23% reactivation rates. We see these reactivations really accelerating. They accelerated a lot late last week, and we expect that to continue. More generally, in commercial aviation, we hear from airlines that bookings are starting to overtake cancellations, they're starting to add some international routes back in May, and load factors are picking up. Assuming that as a society we continue to make progress against the pandemic, We think that commercial air travel will come back faster than it did after 9-1-1 because the airline industry is much more sophisticated in managing its product and marketing its product than it was 15, 20 years ago. On the business aviation side of our company, many industry experts are saying that COVID-19 may be a catalyst for the industry, as those that can afford to fly privately will be more inclined to do so out of concerns over the pandemic. But enough on green shoots. We can't afford, we can't count on an industry recovery and we need to plan for the worst and hope for the best. So let me turn back to the COVID operating plan I mentioned a moment ago. The first goal of our plan is to protect the health and safety of our employees and our customers. This is especially true in our production facilities where we implemented new work rules and schedules to ensure safety and redundancy. And in our labs where scouting crews have maintained access to critical pieces of equipment. Elsewhere, we've implemented work from home policies and our team of over 1,000 employees has done a great job of working remotely but staying connected and working as a team. Today, we're starting our phase three entry into our business aviation headquarters in Bloomfield, Colorado as we follow Colorado's shift from work from home to safer from home guidelines. I'm really proud of the way our employees have risen to the challenge of adopting the new ways of working communicating and staying aligned in these challenging times. After safety, our next priority is focusing on the financial health of GoGo and creating value for shareholders. To do this, we established three goals to guide our planning efforts. They are, first, to ensure we maintain the minimum liquidity we need to run our company. Second, to continue paying the interest we owe on our debt. and third to achieve the first two while preserving the strategic franchise value of our two businesses. Our approach has been to develop and continually pressure test multiple scenarios for the depth and duration of the COVID pandemic in our markets and then develop operating plans to address those scenarios. The operating plans in turn drive 16 cost levers that we can pull the push to manage our cash expenses. to give you a flavor for the process. Our original worst-case scenario for the CA business assumed a two-month ground stop in the U.S. and a three-month ground stop in the rest of the world, with recovery starting at 20% of former traffic and settling back up to 80% of former traffic in 2021. So let me walk through the levers in no particular order and give you a sense of where we are. The first lever is our satellite partners. We're asking them to reduce our costs commensurate with the reduction in capacity we need to satisfy demand. Generally, they've been very cooperative, as they value our future business once the pandemic has passed. We're close to completing documentation on terms with more than half of our satellite partners and are very close to reaching terms with most of the rest. We'll obviously favor partners in the future who help us today. The second lever is airlines. who are themselves quite cash strapped but are amenable to ways we can both reduce costs. In our case, that generally is around delaying installations, especially installations tied to older deals where we heavily subsidize equipment. As Barry will share in a moment, this has gone very well and we have very few installs planned for the rest of this year. The third lever is delaying purchases. which is mostly centered around the inventory side of the airline installations I just discussed, but has required extensive negotiations with suppliers where we had pre-existing orders. The fourth, fifth, and sixth levers are travel, marketing, and non-essential spending. Obviously, our need to travel has been curtailed, and most of the shows that consume our marketing dollars have been canceled. The seventh lever is focused on working capital, especially the timing of payments. The eighth and ninth are product initiatives, like our GOGO 5G and KA initiatives, where in our best case scenarios, we do not trim expenditures at all, but in our worst case scenarios, we can delay projects and save substantial amounts of money. Letters 10 through 16 are all personnel related actions. 10 was to delay payment of my bonus for 2019, which is done. 11 looked to delay merit increases for 2020, which has also been completed. The 12th was a hiring freeze, largely done except for critical backfills. The 13th was reducing contractor headcount, which was largely complete. The 14th was salary reductions, which went into effect last week, starting with a pay cut for our board of directors and then for almost all employees who were not furloughed. The 15th is the furlough program, which also went into effect last week, impacting approximately 54% of our workforce. And finally, the 16th would be a reduction in force, which we hope to avoid, but could become necessary if we need to go there to ensure our solvency in the future. In our best case scenario, these reductions save us roughly $170 million in cash between now and the end of 2021. and in the worst case scenario, they save us $330 million in cash over that same period. We believe these savings should be adequate to tide us through the sunnier days. However, we continually model new scenarios in case this downturn is substantially deeper and longer than our current worst case projections and we're developing plans to address those scenarios if need be. I want to thank the GOGO team for the hard work and creativity they have displayed in developing these plans and also for the sacrifice all of them are making to ensure the long-term survival of our company. This has truly been a team effort and it is deeply appreciated. Now let me turn to the strategic track. As we've said many times in the past, we have two valuable businesses. and management views our job as realizing the value of those businesses for our shareholders. Our business aviation division operates in a very attractive industry with relatively little customer concentration, an under-penetrated market, strong market position and little direct competition. We offer the industry's leading product at an attractive price relative to competitive solutions and we have significant barriers to entry due to our proprietary spectrum and ATG network. Financially, our recurring revenue model generates strong cash flow which allows us to invest in enhancing our product offerings and maintaining our product advantage as we did with the launch of our Avance product line two years ago and as we will do with GoGo 5G. Though our BA business has been affected by the COVID pandemic, We expect that it will recover more quickly than commercial aviation as destinations open for business and aircraft start to fly again. Our CA business operates in a more challenged industry with high customer concentration, a more heavily penetrated market, and a lot of competition. Everyone agrees that broadband commercial aviation, IFC, is an attractive growth industry. Passenger adoption is growing quickly. and OEMs and airlines are poised to drive more operational applications as the quality of in-flight broadband grows in the future. But no player in the industry has yet built a sustainable business and they won't unless the structure of the industry fundamentally changes through either horizontal or vertical business combinations. GOGO Commercial Aviation brings an attractive and unique set of assets to such a combination. We have leading market share with attractive customers and strong customer relationships. We have industry-leading competencies in engineering, software sales, support, network management, and other areas. We have the leading IFC product in the world in GoGo2KU. And we have an asset-like business model that affords us tremendous flexibility as the satellite industry moves quickly toward a multi-urban, multi-spectrum future. On the multi-orbit front, GOGO's unique 2KU mechanical phase array antenna is the only terminal technology proven capable of working with an NGSO satellite constellation, as demonstrated with OneWeb earlier this year. On the multi-spectrum front, GOGO has developed the ability to cost-effectively convert a 2KU antenna into a 2KA antenna, which could open up the GOGO 2KU fleet to KA operators as well as KU operators. Our multi-orbit, multi-spectrum position is important to customers as well as potential merger partners. For customers, it means that we have the flexibility to continually integrate the latest and best satellite technologies from whomever and in whichever band they may emerge. This has always been important and is particularly important in times of uncertainty like now. Our open technology platform also means that our leading market position and capabilities can be combined with a wide range of potential partners regardless of spectrum, band, or orbit. We think consolidation could take a few different forms, either vertical integration with satellite operators who want to enter the aviation market directly, horizontal integration with another service provider to drive scale economics, or consolidation by an aviation company seeking to further integrate connectivity into its product portfolio. We believe that consolidation is overdue in the CAIFC space, that the depressed revenue across the industry will be a catalyst to drive that consolidation, and we want to make sure our shareholders are a beneficiary of that consolidation. Now let me finish with the financing track. We're not in the market for financing at this time. But we always entertain conversations with many different actors to make sure we understand the realm of the possible should our operating and strategic tracks that I discussed a moment ago not generate satisfactory results. The only financing activity we're pursuing at the present with the U.S. Treasury Department under the CARES Act, which provides two potential opportunities for GOGO to receive assistance. the $32 billion short-term payroll protection grants for air carriers and contractors, and the $29 billion in loans and loan guarantees for air carriers, including Part 145 repair stations like DOGO. We applied for $81 million under the grant program and $150 million under the loan program, and I've heard that we are under consideration but not yet approved for either. Should we receive government assistance, We would roll back all or most of the furloughs and pay reductions that I discussed earlier and obviously defer any other employee actions until after September 30th. With that, let me turn it over to Barry to do the numbers.