Gogo Inc.

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Thank you, Jimmy, and good morning, everyone. Welcome to GoGo's second 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 filed this morning and are more fully detailed under the risk factors in our annual report on Form 10K and 10Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is August 10, 2020. 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 more information or future events. During the call, we'll present both GAAP and non-GAAP financial measures. We've included Thank you for joining us. 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. Good morning, and welcome to our Q2 2020 earnings call. And it certainly was an extraordinary quarter, but for all the wrong reasons. I think I can sum it up by saying that if you sell Internet on airplanes and no one's on the plane, it's tough to make a living. Anyhow, our consolidated revenue was down 55% from prior year, and despite very significant cost reductions, our EBITDA fell into negative territory for the first time since Q4 2013. The only positive metric was that we eked out a $1 million profit and unlevered free cash flow for the quarter. That said, there are green shoots starting to emerge. We're seeing a really solid bounce back in our business aviation division and a slower recovery, but a recovery nonetheless in our commercial aviation business. Our commercial aviation gross passenger opportunity numbers really tell the story, what we call GPO. In pre-COVID times, we were averaging 37 million passengers a month on GOGO equipped aircraft. In April, that plummeted to 1.9 million passengers, down 95%. It recovered to 3.9 million in May, 7.1 million in June, and though we don't have final GPO numbers for July, we've continued to see steady increase in flights, load factors, and user sessions in July and August. And I'll get into those in a little more detail in a moment. Through all this turbulence, we remain laser focused on our liquidity and on driving shareholder value. And as I outlined on our last earnings call, We've developed a three-track plan of attack that we call our value creation plan. The first track is a COVID operating plan focused on preserving our liquidity through the end of the pandemic. The second track is a strategic initiative to combine our commercial aviation division strengths with another enterprise to position the combination for success in the commercial aviation IFC market. And the third is a financial track aimed at dealing with our convertible debt and backstopping the first two tracks should we need to do so. With that said, let me now turn to the COVID operating plan. We now forecast that we will achieve savings in greater than the high end of the range we shared on our last call. And unless there's another major setback from COVID, we believe we have enough liquidity to survive this pandemic. Our financial projections are based on the US domestic passenger traffic market recovering to 50% of 2019 levels by the end of 2020 and 71% of 2019 levels by the end of 2021. And on the rest of the world, air traffic returning to 44% of 2019 levels by the end of 2020 and 72% of 2019 levels by the end of 2021. Now I'm going to step through each of our three segments and share a lot of operating metrics. The pattern will be a bit repetitive, so I apologize, but I'm trying to share our pre-COVID levels and where we bottomed out at the bottom of the chasm, if you will, and then the recovery that we've seen so far. So let me start with our business aviation division. Pre-COVID, we averaged about 3,500 flights a day. On April 12th, we hit the bottom of the chasm with 397 flights. We view daily flights as an important metric because flight activity drives demand for in-flight connectivity. Since averaging 793 flights per day for the month of April, we've seen a nice comeback with 1,600 flights per day in May, 2,500 per day in June, 2,600 in July, and up over 2,700 in August. The big issues for us in the quarter were A, that 22% of our accounts suspended service, and B, another 22% downgraded their service plans. The good news is that 64% of those that suspended accounts have now unsuspended and 80% of those that have downgraded plans have now upgraded. The best news is that 90% of those that suspended or downgraded have moved back to their original plans or higher-priced plans, which bodes well for a rebound in our ARPU going forward. We ended the quarter with 5,400 ATG aircraft online, down from our high of 5,700 at the end of Q1. As we look ahead, we expect ATG units online to recover to our prior high in the first half of next year. With the combination of accounts and pay plans being reinstated and steady growth in aircraft online, we expect service revenue to begin recovering this quarter and remain on a fairly steady recovery track for the next several quarters. ATG units shipped in the quarter fell to 100 units from an average of 227 units a quarter last year. And we expect units shipped to grow this quarter and next, though not to recover to last year's level this year. On another positive note, In the next week or two, we expect to surpass 1,000 Avance L5s installed and flying and also surpass 450 L3s installed and flying. Customer satisfaction with this product has been very high and it is by far our most successful product launch ever. In the longer term, we think that COVID-19 may actually be a catalyst for the business aviation industry. Dealers and fractional operators report a huge surge of sales inquiries which is good news, but we've not yet seen that turn into orders in our order book. In our commercial aviation North American segment, we've seen steady growth in passenger traffic since April. Pre-COVID GPO was averaging 27 million a month and then collapsed to 1.5 million in April. It then started to recover and went up to 3.3 million in May and 6 million in June. Flights per day are another good barometer for the health of our CA market. Pre-COVID, we were averaging a little more than 10,000 flights a day in our North American segment. At the bottom of the chasm in April, we saw a couple days as low as 2,300 flights per day. In May, we averaged 2,700. In June, that grew to 3,500. In July, it grew to 5,300. And in August, we're averaging a little more than 6,000 flights a day. The good news is that over that same period, load factors also rose. From the 10% to 20% range in April, depending on what airline you're looking at, up to the 40% to 60% range this month, all of which bodes well for our Q3 gross passenger opportunity. All of these data points show that the CA North American market is recovering. and many more. We're still way off where it was last year, but it is recovering nonetheless. And that recovery is starting to come through in our numbers, starting with sessions. Pre-COVID, we were averaging 125,000 sessions a day, which then collapsed 91% to 11,000 sessions a day in April. It started coming back with 15,000 a day in May and is now all the way up to 40,000 a day or 32% of pre-COVID levels in August. Now, I'd like to discuss sales, not revenue, because given 606 accounting and other similar factors, sales are a better measure of daily cash generating activity than revenue. Pre-COVID, our North American sales averaged just under $1 million per day. In May, that number collapsed to just under $200,000 a day. In June and July, it grew to $275,000 a day, and in August, it's run a little more than $300,000 a day. The downturn in our sales and the recovery are more muted than the session downturn in recovery because monthly service plans and other recurring revenue sources, which accounted for about 25% of our daily sales pre-COVID, are stickier than daily in-air sales. and account for roughly, I'm sorry, and accounted for roughly 25% of our CA service sales from pre-COVID times. We ended Q2 with 2,500 aircraft online in CANA, down 25, I'm sorry, 2,455 aircraft online in CANA, down 25 from the prior quarter, but up 12 from prior year. Not all those aircraft were active, though, in the quarter. Our low point was roughly 1,200 active aircraft per day in early May, about two-thirds of which were ATG regional jets. U.S. airlines relied heavily on regional jets at the bottom of the chasm because they're cheaper to fly than mainline jets, and if no one is on the plane, it doesn't really matter what jet you use. At the end of the quarter, we were up to about 1,500 active tails per day. and as of last week, we were up to more than 1,800 active tails per day or 73% of our North American fleet. It's tough to predict the impact of COVID on our fleet count going forward because airlines don't always retire all the aircraft they say they plan to retire, but we estimate that there are about 230 older go-go installed aircraft that North American airlines may retire as they downsize their fleets over the coming year or so. For the quarter, and so far into Q3, we have run a little ahead of our forecast. So we believe our forecasts for North America are pretty accurate and give us a good basis for projecting our liquidity. In our CA rest of world segment, the downturn was about the same as the North American segment, but the recovery has been slower. Pre-COVID, our rest of world GPO was running at 11 million passengers per month. and that collapsed to 480,000 or 95% in the month of April. And May was no better. There was a modest recovery in June to being down only 89%. And since that time, we have seen more recovery. Pre-COVID, rest of world flight counts were running at about 2,600 per day. In April, in the April chasm, that sank to less than 400 per day. and then that started climbing in mid-June and climbed steadily to an average of 700 per day in July and more than 900 per day in August. Roughly three-quarters of these flights are domestic flights in non-U.S. markets, which is Japan, Brazil and Australia. Load factors are extremely dispersed with higher factors on domestic non-U.S. flights and quite low factors on intercontinental flights. Positive trends are also starting to come through in our numbers. Pre-COVID, our rest of world division was averaging 47,000 sessions a day, which collapsed to 94% to 2,700 sessions in April, but has grown to 6,000 a day in June and are running at more than 9,000 a day for August. Sales followed a similar muted pattern as North America, running at 114,000 a day pre-COVID, and dropping down 76% to 27,000 a day in April and then started a steady recovery and are now back up to a little more than 40,000 a day in August. Rest of world aircraft online actually grew in the quarter, up 9 to 842 and up 151 from prior year. Due to retirements and bankruptcies, we expect roughly 100 of our current rest of world fleet to be de-installed over the next year or so. Again, these numbers are hard to predict because in this environment, airline fleet plans can change rapidly. These de-installs will be offset by installations of backlog, which currently stands at 517 aircraft, though we consider 105 of those to be at risk due to bankruptcies. Net-net, we still expect significant growth in our rest of world fleet over the next several years. So there may be some declines in the short run. Enough on green shoots. 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 cost side of our COVID operating plan. The first goal of our plan is to protect the health and safety of our employees and their customers. We've implemented work-from-home policies, and though all of our US facilities are now open with extra safety precautions, only a fraction of employees are actually working from the office. at this point in time. I'm really proud of the great job our team has done of working remotely. Despite furloughs and risks, they've stayed connected and worked as a team. After safety, our next priority was focusing on the financial health of GoGo and creating value for shareholders. 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 or push to manage our cash expenses. The commercial aviation market conditions are pretty consistent with the worst case scenario we developed back in March. And in the business aviation market, the dip was much deeper than we anticipated, but the recovery has been much faster. Last call, we forecast $170 million in savings in 2020 and 2021 in the best-case scenario and $330 million in the worst-case scenario, and are now projecting greater than the $330 million in case savings because we're closer to the worst-case scenario out of the 16-lever plan. The latest and most significant lever was our announcement two weeks ago of a reduction and many more. We've now reduced headcount and our commercial aviation division by 30%. We'd always stated that a RIF was our 16th lever and sadly with airlines in such difficult circumstances, we had no choice but to move from furloughs for a RIF if we were to meet our liquidity requirements. Pay reductions will continue and our compensation committee has announced that it plans to pay our 2020 bonuses in stock unless the company should have adequate cash reserves to pay in cash. I won't go through the details of the other levers again other than to say that virtually every supplier we have is working with us to get through this pandemic and we are very grateful for their help. We've also had help from some of our airline partners who have delayed installations or found other ways to help us reduce cash burn. We've tried to minimize the impact of our cost reductions on two levers that are product related, our GOGO 5G initiative and our 2KA initiative. And though we've shifted some spending around on those, we've done so without affecting timing. 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 have plans to address those scenarios if need be. I want to thank the GOGO team for the hard work and creativity they've displayed in developing these plans and also for the sacrifice all of them are making to ensure the long-term survival of our company. I also want to thank those that will be leaving us August 14th. Your departures have nothing to do with your individual knowledge, skills, or effort. They're driven by circumstances no one could have predicted and that are beyond all of our control. We wish you the very best in the next stage of your careers. Now let me turn to the strategic track. As we've said many times in the past, we have two valuable businesses. and management views our job as realizing the value of both those businesses for our shareholders. Our business aviation division operates in a very attractive industry with relatively little customer concentration, an under-penetrated market and a strong market position. We offer the industry's leading product at an attractive price relative to competitive solutions and we have unique advantage 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 advanced product line two years ago and as we will do with GoGo 5G in 2021. Our CA business operates in a much more challenged industry with high customer concentration, a more heavily penetrated market, and a number of competitors. Everyone agrees that IFC and commercial aviation is an attractive growth industry. Airlines are moving to free service, which will drive adoption, and OEMs and airlines are poised to drive more operational applications as the quality of in-flight broadband grows in the future. But for IFC players to capture this attractive growth potential and drive innovation, the industry would benefit from fundamental changes through either horizontal or vertical business combinations. Recently, we've received questions about whether we are in a process to sell our commercial aviation division, and we'd like to make the following comments in reaction to those inquiries. We've long talked about the strategic benefits of combining our CA division, either A, with another service provider and driving scale economics, or B, with a satellite operator and driving utilization economics, or C with an avionics company in facilitating data transfer as a connected aircraft becomes a reality. COVID has accelerated consolidation discussions as industry players look to emerge from the crisis with the strongest portfolio of assets they can to capture future industry growth. GOGO Commercial Aviation brings an attractive and unique set of assets to such a combination for both strategic and financial buyers sponsoring such consolidation ideas. We helped create the IFC segment and have established a leading market share with many of the world's leading airlines. We have industry-leading competencies in engineering, software, sales, support and network management. We have the leading IFC product in the world in GoGo2KU, and we have an asset light business model that affords us tremendous flexibility as the satellite industry moves quickly toward a multi-orbit, multi-spectrum future. Several parties expressed interest in our CA business in the second quarter. And as a result, we retained BDT and company as our primary advisors and launched a formal process this summer to evaluate our strategic options for that business. We've been in extensive discussions with multiple parties and feel optimistic that a deal may happen. However, we cannot be sure that we will be able to consummate a transaction. We do not want to impact our negotiations by saying too much publicly, so we'll not answer questions or comment further at this time, and we'll not be providing regular updates on this matter until it is appropriate to do so. I would add that we've taken steps to facilitate a transaction by completing a series of steps that began two years ago to formally separate our two businesses. It started in 2018 when we split business aviation out organizationally as its own division. In 2019, we moved our ATG network and operations under the new business aviation division, which aligned our networks with the division that most relied upon that particular network. So BA manages ATG and CA manages the satellite network. At the beginning of 2020, we split out corporate expense to provide visibility of these costs, which helped investors more clearly see the value of the two businesses. And finally, in July, we completed a legal separation of the two businesses by establishing separate balance sheets and segregating assets, liabilities, contracts, licenses, and employees by division. We are really proud of the commercial aviation team and the tremendous capabilities they've built. and think it will have a bright future as part of a larger, more fully integrated entity.