Gogo (NASDAQ:GOGO) Q4 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2019 GoGo Incorporated earnings conference call. At this time, all participants are now listed in only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the conference over to your speaker today, Will Davis, Vice President of Investor Relations. Please go ahead, sir.

0:30 Thank you, Sonia. And good morning, everyone. Welcome to GOGO's fourth quarter 2019 earnings conference call. Joining me today to talk about our results are Oakley Thorne, President and CEO, and 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 caption risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC.

1:23 In addition, please note that the date of this conference call is March 13, 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 new information or future events. During this call, we'll present both GAAP and non-GAAP financial measures. We included a reconciliation explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter earnings press release. This call is being broadcast on the internet and available in the investor relations section of the GoGo website at ir.gogoair.com. The earnings press release is also available on the website.

2:11 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.

2:20 Thanks, Will. Good morning, all. Welcome. We had a great fourth quarter and a great full year, but with the stock down substantially in recent weeks, with the uncertainty around the coronavirus and the Delta Airlines free Wi-Fi program, people are less interested in past performance than they are in trying to understand future unknowns. So I'm just going to start with the coronavirus today and then discuss in order the Delta free program and then get back to some of the fundamentals of our business trends in the satellite industry that are driving down our costs, then discuss industry consolidation and how we might fit into that consolidation and discuss a change we're making to our equity compensation plans. And finally, I'll discuss the quarter and the year and provide some high level thoughts on what will be a very difficult to predict 2020.

3:13 So let me start with the news of the day, the coronavirus. This is a very, very, very fast moving situation in our industry. and in fact, a great deal has just changed in the last 48 hours. Needless to say, our primary concern is the health and safety of our employees and our customers. But our next concern is with the financial health of GOGO. As I discuss the impact of coronavirus on our different CA regions, I think it would be helpful to give you the regional breakout of our 2019 in-air sales revenue so you have a frame of reference. Roughly 73% of our in-air revenue from flights originating in North America, 19% originating in Asia, 5% in Europe, and 3% somewhere else.

4:00 In January and February, we were on track for a great start to the year at both our business aviation division and our commercial aviation division. And two weeks ago, we started to see a significant decline in Asia for our CA division as US Airlines canceled flights to the region and domestic travel in Japan declined significantly. In the first week of March, we saw a decline in international travel more broadly, which lowered our total CA in air sales by 6.7% versus trend for the prior two months. This week, we're seeing a more pronounced decline in U.S. traffic, with some of our larger commercial airline customers down as much as 15%, and we expect a further decline in European traffic with the flight ban that goes into effect tonight.

4:50 In the CA division, it's very hard for us to predict exactly how this will play out. And different airlines are predicting a wide variety of different potential outcomes. We'll obviously be negatively impacted as airlines take planes out of service. How badly we're hit will depend on what happens with load factors and on how long travel is impacted by the virus. We also anticipate that there could be a reduction in installations and equipment revenue as airlines cut back on capital spending, though perversely, that could help cash flow if those are older, subsidized equipment deals. We had $204 million of cash on hand in the bank as of last night.

5:37 We're planning through a variety of scenarios and taking immediate steps to match our revenue declines with cash expense reductions in order to preserve our liquidity. That starts today with the CEO deferring his 2019 bonus until GOGO is in half-year times. We'll provide more guidance on our coronavirus actions as events in our plans unfold. The only good news in all this is that we see no impact yet on our business aviation segment. Some analysts believe that this could drive demand for private aviation in the future. Now let me turn to Delta Free. As I said before, we'll leave it to Delta to announce their plans. Our role is to provide the operational support to make those plans happen.

6:22 Under today's turnkey contract, we subsidize the installation of Delta's jets, we charge Delta's passengers for connectivity, and then we pay Delta a royalty for access to their aircraft. In a free model, that will completely change, and assuming we come to terms, Delta would pay for equipment and pay us for passenger connectivity. However, as Delta will now have to pay for connectivity, Delta will want to make sure it is getting competitive pricing and competitive service levels. Hence, may want to move to a multi-supplier model for domestic mainline aircraft. Though we would not relish the idea of having a competitor join us at Delta, we coexist with competitors at most of the airlines we serve, and we compete very well on price and customer satisfaction at those airlines.

7:12 We expect demand to grow significantly when Delta goes free, and though no agreement has been reached, we and Delta expect us to grow our revenue from Delta in a post-free environment, even when you include the impact of some planes potentially moving to a competitor. We further believe that Delta's move to free service will be a catalyst for other airlines to provide free service, thereby driving more demand for our product and more revenue and cash flow for GoGo. Now I'm going to talk about some trends in our business because we believe we're going to survive coronavirus, and I think it's important that investors understand the underlying strategic issues and trends in our industry. So let me start with developments in the satellite industry.

7:57 I want to start with a few comments on what we're seeing in SATCOM pricing and the impact that has on our CA, rest of world segment, future profitability. As we replace expiring rest of world satellite contracts with new contracts, on average, we're seeing a 67% decline in per unit pricing. If all of our current capacity in rest of world were priced at those levels today, our rest of world segment would break even on a segment profit basis in 2021 and be profitable in 2022. Of course, not all those contracts are at those prices today, but two thirds of the current contracts in rest of world will expire in the next three years and we'll have the opportunity to replace them with much cheaper capacity.

8:42 Two other positive trends are non-geosynchronous orbit satellites, NGSOs, which we expect to start coming online in 2022, and the emergence of managed services, which give us much more flexibility in terms of what we can provide our airline customers. Let me start with why NGSOs are important. As we study the most frustrating aspects of in-flight connectivity to passengers, Many of them are a result of the high latency inherent in geostationary satellites. NGSOs, such as Medium Earth Orbit Satellites, MEOs, and Low Earth Orbit Satellites, LEOs, are much closer to Earth, so packets from the teleport to the satellite to the aircraft travel a much shorter distance, hence arrive much faster than with a geosatellite.

9:31 In our lab testing, complex web pages downloaded more than three times faster with a MEO satellite than with a GEO satellite. This type of responsiveness is not only important for web pages, but also for cloud-based applications like Microsoft 360, for VPN connectivity, for gaming, for interactive chat and IM apps, and the like. So very important for driving passenger satisfaction in the future. and since a number of airlines tell us that quality IFC is now their number one driver of customer satisfaction, we believe airlines will value low latency solutions. We're working with potential NGSO partners on a variety of fronts and hope to soon demonstrate that our Fincom 2KU antenna can work with LEO constellations and hope to have an announcement in that regard shortly.

10:21 I should note that all of our competitors use traditional gimbal antennas, They won't work with LEO constellations, so airlines installing that equipment will have to go through an expensive upgrade if they want the benefits of LEO low latency. The other innovation is around managed services. Many years ago, when we decided to expand into satellite-based ISC, we had to either become a reseller of our competitors' network or build our own network, what I'll call the network ownership model. We chose to build our own in KU band spectrum at that time because it was the only spectrum with enough global coverage, capacity, and redundancy to meet our global airline partners' needs. In the network ownership model, we must buy capacity wherever our airlines fly, and we pay for it no matter how little we use it.

11:11 The new trend is that some satellite operators are developing enough of their own coverage that they can begin to offer us a managed service where we buy by the drink instead of in bulk. This model has the benefits of reducing our fixed costs, increasing the burstable capacity we can bring to airlines, improving our capacity utilization, and enabling us to tailor solutions to individual airlines' needs. Though we remain committed to supporting our current customers with KU connectivity, we also see opportunities to reduce regional managed service KA solutions that will require very little capital investment upfront from us. The point of my discussion of MGSOs and managed services is that because of our asset-light model and the open architecture flexibility we've built into our solutions, we're able to quickly pick best-of-breed solutions provided by our partners and deliver them to our customers.

12:09 In contrast, our vertically integrated competitors have committed their next several years of capital investment to KA band geo solutions and will have a hard time augmenting those investment plans to compete with all the innovation our satellite partners are bringing to market. Now, let me turn to some of the dynamics inside the IFC industry itself. At Govo, we have two businesses, business aviation and commercial aviation. And we believe our current enterprise value significantly underestimates the value of those two parts. Our business aviation segment is a solid franchise. It produces solid growth in a relatively under-penetrated market.

12:54 It produces strong recurring cash flows. It has proprietary technology and intellectual property, a compelling product roadmap, and a very strong position in a relatively price-insensitive market. Our commercial aviation segment also represents real value. It has leading share in a fast-growing industry, a very attractive customer base, a very strong product roadmap, and strong product integration, engineering and distribution capabilities. The issue in the commercial aviation IFC space is that there are too many competitors and nobody yet has enough scale to build a sustainable business for the long term. We believe that some consolidation will occur in the CAA IFC space and we're working hard to leverage our leading market position to make sure that our shareholders are among the beneficiaries of that consolidation.

13:50 In order to make the value of the parts of our business more evident, in the 10K we'll file today, we've broken out our corporate expenses from the BA and CA segment expenses so investors can see the performance of our operating segments on a standalone basis. Now, I'd like to touch briefly on some changes to our stock-based compensation that our Compensation Committee has approved. It's important to understand that GOGO's most important asset are its employees. We work in an industry that demands very specific knowledge and skills. Our employee equity compensation plans were put in place years ago and no longer act as the retention vehicle we need. 84% of our stock options are more than 300% out of the money and more than 99% or at least 180% out of the money.

14:41 Given the issues we face with coronavirus and other challenges, We think it's time to bite the bullet and offer an options exchange to our employees that receive equity compensation so that we have a real retention tool and employees have a piece of paper with real value. The exchange, which will be in the proxy, has the added benefit of returning roughly 3 million shares into our employee omnibus incentive plan pool, thereby reducing the need for us to come back to shareholders to replenish the pool in the near future. I think this is very important. because retaining our highly skilled employees will be very important to realizing the strategic value for GoGo that I discussed a moment ago. Now let me turn to the quarter of the year. As I mentioned, we had a really solid quarter and a great year.

15:29 We exceeded our revenue, adjusted EBITDA and free cash flow expectations by wide margins. Perhaps the most important metrics are first, free cash flow, where we improved dramatically despite having an extra interest payment in the year. and second, Unlevered Free Cash Flow, which improved from a very negative number in 2018 to a very positive number in 2019, demonstrating the underlying earnings power of the business. As always, I'm very proud of my GoGo teammates for delivering such a great year. We've worked hard to improve our operations, execute on our strategy, and achieve our financial goals. I think we're making great progress, so thank you. Our business aviation division had a really solid quarter with record revenue for both service and equipment and good cost control, which in turn delivered record segment profit.

16:21 The BA division added 142 APG aircraft online in the quarter to reach just under 5,700 a year and up 9% from prior year and achieved accelerating average service revenue for aircraft throughout the year to end at $3,200 per unit in Q4, up 5.4 from prior year. Shipments were strong, especially for the Avantel 5 product, which shipped 171 units in the quarter, tied for our highest quarter ever. Turning to our CA segments, if you add the two segments together, we crossed an important threshold with positive combined annual segment profit for the first time. In our commercial aviation North America segment, we achieved quarter-over-quarter growth in aircraft online with a positive for the quarter. In CA, rest of the world, we installed a growth 77, net 71 planes in the quarter, which was up over prior quarter and flat with prior year.

17:19 Row service revenue was flat with prior quarter because planes installed this quarter have yet to produce solid take rates, but was up 21% over prior year. Some planes in newer fleets began to mature. Across CA segments, we installed exactly 400 aircraft online, which was at the bottom of our guidance as a result of the max grounding, the federal government shutdown, and internal operating issues at certain airlines. We crossed a major product mix threshold in the quarter, with more than 50% of all CA aircraft now on satellite IFC as opposed to ATG IFC. We also finished the quarter with a strong 2KU backlog of nearly 950 aircraft, as we picked up 150 aircraft new commitments from existing customers on top of the 70 aircraft on order from Qatar.

18:11 With that, let me turn to 2020. Needless to say, it's a year of considerable uncertainty due to the coronavirus. So we're going to share what our guidance would have been without the coronavirus and update as the situation solidifies. In order to manage growth expectations, as it would have been, I think it's important to remind you that over the course of 2019, we highlighted approximately $35 million of non-recurring revenue benefits, which equated to a benefit of $31 million of non-recurring adjusted EBITDA. When you adjust to these items, 2019 adjusted EBITDA would have been roughly $115 million, still well ahead of guidance and prior year, but less than our reported adjusted EBITDA of $146 million.

18:57 If you think of our trajectory, we had 71 million of adjusted EBITDA in 2018. Excluding the non-recurring revenue, we had adjusted EBITDA of 115 in 2019. And our pre-coronavirus budget continued that trend in 2020. The point of sharing what our 2020 plan would have been is to show that ex-coronavirus, we have a healthy business that is now going to suffer a setback. But I believe we can fight our way through this and preserve GOGO's franchise values. We'll continue to serve our employees and customers well. We're going to focus on maintaining our liquidity. And when we get through this pandemic, I believe we'll be stronger than we were before. With that, I'm going to turn it over to Barry for the numbers.

19:41 Thanks, Oak. And good morning, everyone. I'll start with an overview of our financial and operating performance and conclude with a summary of our approach to the way we're handling our 2020 outlook in the context of the coronavirus outbreak. GoGo delivered another strong quarter and year with adjusted EBITDA in the mid $30 million range for the fourth quarter in a row, record annual segment profit for both BA and CA, and a $163 million improvement in free cash flow in 2019 as compared to 2018. 2019 adjusted EBITDA of $146 million was more than double the $71 million achieved in 2018, and over 70% above the midpoint of the expectations we set coming into 2019.

20:31 As I've mentioned, there were some non-recurring benefits included in the 2019 results, but even considering those factors, 2019 represented a dramatic turnaround in GoGo's financial performance. In addition to the strong adjusted EBITDA performance, we reduced our cash burn during the year very substantially. for the first time since GOGO went public seven years ago, the company achieved positive unlevered free cash flow on an annual basis. And it was meaningful at $85 million. The $163 million improvement in free cash flow over 2018 was well ahead of the at least $100 million improvement we guided to coming into the year.

21:16 And this was despite $39 million more in interest payments in 2019 due to the refinancing we completed in May. This improved cash flow performance is the result of three factors, lower investment in airborne equipment, adjusted EBITDA coming in well ahead of plan, and improvements in other working capital, primarily accounts receivable. We exceeded the aggressive targets we set for reducing inventory purchases and improving accounts receivable during the year. This pulled forward some of the improved cash flow performance we had previously expected to occur in 2020 and enabled us to finish the year with a very strong cash balance of $170 million. This additional liquidity is even more important given the uncertainties created by the coronavirus outbreak.

22:06 While we're on the balance sheet, it's worth reiterating that a significant accomplishment during the year was the comprehensive refinancing we completed in May. We are now in a very different situation than we were coming into 2019. We pushed out 80% of our debt maturities to 2024, lowered the interest rate on our senior secured notes by 2.58%, and added a $30 million ABL facility to provide some additional liquidity buffer. Before turning to our operating performance, let me touch on the change in financial information discussed on this call and reflected in our earnings release and 10K. You'll see that we've excluded corporate costs from segment expenses in calculating segment profit.

22:52 This new reporting provides greater visibility into the specific performance of our operating divisions as well as corporate spending. You'll also see that 2019 corporate costs of $33.4 million excluding stock-based compensation were reduced by 17% from $40.3 million in 2018. Of course, reducing these costs was also a focus of our 2018 integrated planning process. I'll now turn to a discussion of our fourth quarter operating results, beginning at the consolidated level. Total revenue of $221.3 million increased 2%, with service revenue growing 4% and equipment revenue declining by 5%. BA equipment revenue was up 22% over the prior year period, while CA's equipment revenue declined from the prior year, primarily due to fewer aircraft installations under the airline-directed model.

23:55 Adjusted EBITDA of $34.4 million for the quarter significantly surpassed internal and external expectations, resulting in 78% growth from Q4 2018. This quarter's performance was driven by strong BA segment profit of $41.7 million, up 17%, and a 37% reduction in our ROW losses to $15.1 million. Our bottom line performance has benefited from disciplined cost management across both CA and BA. Department and SATCOM expenses were $34 million below our internal budget for the year as a whole, while approximately $2 million of these savings related to timing.

24:41 A tangible demonstration of the improved operational and financial discipline in the company achieved during the past year. Let's now turn to a discussion of our business segments. In summary, both BA and CA delivered excellent results for the year. BA overcame the ADS-B channel constraints of the first half of the year to achieve a record $144 million in annual segment profit. with service revenue growing 13% year over year. On a combined basis, CANA and CAROW posted positive annual segment profit for the first time, totaling $36 million, excluding corporate costs, and was still modestly profitable when including these costs.

25:28 Now let's review the BA operating results in detail. BA had an outstanding fourth quarter. Total revenue of $85.9 million grew 17% from the prior year period on the strength of both services and equipment. Service revenue of $58.6 million grew 14% with 9% growth in ATG units online. For the fourth quarter, ATG average monthly service revenue grew 5% year over year, up from a 1% increase in this metric during the first quarter of 2019 over the first quarter of 2018. This represents a reacceleration in the growth of BA's unit economics as measured by average monthly service revenue and was largely driven by a higher mix of advanced products.

26:20 BA's equipment revenue came back strongly in the second half of the year as OEM sales picked up and as the aftermarket channel began buying more product. as previously constrained installation capacity due to the ADS-B began to relax. Total advanced equipment shipments in the second half of the year were up almost 60% from the levels in the first half of the year and L5 shipments more than doubled. On the strength of this service and equipment revenue growth, BA segment profit grew to a record $42 million in the fourth quarter. representing 49% segment profit margin, very close to BA's all-time high. For the full year, BA achieved total revenue of $309 million, up 6%, with service revenue of $222 million, which was an increase of 13%.

27:11 Equipment revenue was down 7% to $87 million as we managed through the ADS-B overhang and comparisons to very strong shipments in 2018, which was the first full year after our advanced L5, L3 product introduction. This product line has been the most successful product launch in BA's history of strong product launches and continues to be well received in the market. BA reported record segment profit of $144 million for the year and segment profit margins of 47%. within 1% of BA's all-time high.

27:56 ATG Aircraft Online grew 8.5% to end the year at 5,669. This number has grown by nearly 1,000 AOLs since the end of 2017 and carries with it the strong recurring revenue stream which characterizes the BA business. As Oak mentioned, our BA division has not yet seen any meaningful impact from the coronavirus outbreak. Assuming this continues to be the case, as we look toward 2020 for business aviation, we expect service revenue to grow approximately 10%. We wouldn't be surprised to see equipment revenue decline somewhat, largely due to some expected rebalancing of inventory in the distribution channel.

28:41 We expect to see segment profit dollars increase for the year, in spite of a planned increase of $10 to $15 million in OPEX during 2020, for the development of GoGo 5G, which is scheduled to be introduced before the end of 2021. We expect VA's CapEx to increase by $15 to $20 million in 2020 versus 2019. We're very enthusiastic about GoGo 5G, and it is on track in terms of both schedule and cost. As we said from the outset of this program, we expect to spend approximately $100 million in total OpEx and CapEx for GoGo 5G. although we now expect CapEx to comprise approximately two-thirds of this total versus the 50-50 split we previously expected.

29:30 We remain convinced of the value of our business aviation division, though it has not yet been unlocked. As Oak described, BA has a strong market position and the business is very well positioned strategically with a robust product roadmap. As we look at BA over the longer term, We believe this business can generate over $200 million in annual segment profit in the 2022-2023 timeframe with a strong flow through to free cash flow. Now I'll turn to a discussion of our commercial aviation division, starting with CA North America and rest of world on a combined basis.

30:15 Overall, CA made very substantial progress during the year, both operationally and financially. We announced the signing of our first Middle Eastern airline of 70 planes with Qatar, which will drive increased usage of our satcom network in this region of the world. We're also in the final stages of negotiating contracts for some awards with current customers representing 150 additional aircraft, which reflect the improved economics we had targeted during our integrated business planning process. CA segment profit performed well ahead of expectations in 2019 with cost controls running ahead of our IBP plans and with the benefit of the non-recurring revenue Oak described. For the year as a whole, combined CA NA and CA ROW segment profit swung from negative $28 million in 2018 to positive $36 million in 2019.

31:13 Importantly, this $63 million improvement reflects a 31% year-over-year reduction in CAROW segment loss to a $62 million loss for the year. The strong CANA and CAROW combined segment profit is largely due to SAPCOM expenses underrunning plan and the reduction in other operating expenses we had targeted. Satcom costs came in $23 million below budget for the full year 2019, and we see the opportunity for significant unit cost reductions in future Satcom pricing, as Oak described. The cost savings we had identified through our integrated business plan process have also been achieved more rapidly than planned.

32:02 As you will recall, the IDP identified $75 million in annual savings and CA spend, excluding SATCOM expense, between the time we announced that plan in mid-2018 and the end of 2020. Coming into the year, we said we expected to achieve at least half of those annual savings in 2019. In fact, we achieved 75% or approximately $55 million of those savings during 2019. The $63 million improvement in combined CANA and CAROW segment profit over the previous year was clearly a major contributor to our dramatically improved free cash flow performance in 2019. In parallel, we've also made significant strides in working capital management.

32:51 Most of the cash flow improvement from working capital has come through inventory management practices we implemented across the company during the year, and Improving Accounts Receivable in our Commercial Aviation Division. Now I will turn to a discussion of the operating performance for Commercial Aviation North America. Service revenue of $85.5 million declined 4% in the first quarter due to the American Airlines de-installs. Excluding American Airlines, service revenue grew 16% from Q4 2018 and 8% sequentially and was up 14% for the year as a whole. Segment profit was helped by continuing reduction in operating expenses in CANA.

33:38 Reported net profit, excuse me, net ARPA of $112,000 for the quarter was essentially flat with the prior year. But excluding American Airlines, net ARPA was $133,000 of 5% year over year. Take rates of 13.6% were up from 12.9% in the year-ago quarter and were 15.1%, excluding American Airlines. Now let's turn to CAROW, which also delivered a strong fourth quarter. Service revenue of $23.1 million grew 20% over the prior year period, driven by an increase in the number of aircraft online. Equipment revenue of $20 million declined from $27 million in the prior year period.

34:26 Both years included the same number of aircraft installations at 77. The decline in equipment revenue this year was due to a lower mix of installations under the airline directive model. Net ARPA declined as expected due to dilution caused by new airline partners as we saw an 89% year-over-year increase in AOL from new airlines. The segment loss of $15.1 million represents a 37% improvement from the fourth quarter of 2018 and is a result of strong cost controls and increased SATCOM utilization. Operating expenses, defined as ED&D, sales and marketing, and G&A, were reduced by 22%, or $4 million, from the prior year period.

35:14 These operational improvements reduced the CAROW segment loss by 31% for the full year from a $91 million loss in 2018 to a $62 million loss in 2019. As we move from a discussion of our historical numbers to our outlook, let me describe how we are approaching this in the context of the highly uncertain environment created by the coronavirus situation. GoGo is in the midst of a significant transformation. And before the coronavirus upset all of our worlds, We were looking forward to sharing our confidence in the structural improvements in our business, which we expected to continue into 2020 and beyond. In that spirit, I'll provide an overview of the expectations we would have set for the year in the absence of the coronavirus outbreak.

36:06 But we will not be providing formal 2020 guidance as we would normally do on this call. First, let me provide some context for both our adjusted EBITDA and free cash flow expectations and then I'll share the numbers. As Oak described, adjusted EBITDA was on track for a very nice three-year trajectory coming out of the turnaround beginning in 2018. Free cash flow was also on track. As we've cited throughout 2019, we were able to achieve the working capital improvements faster than expected. While this dampened the year-over-year improvement in free cash flow from 2019 to 2020, The aggregate two-year cash flow improvements we cited on our IBP call in late 2018 were very much on track.

36:52 The accelerated working capital improvements have resulted in cash being higher at the end of 2019 than previously expected. Also, as a result of cash flow timing, we had expected flat to slightly declining year-over-year free cash flow improvement from 2019 to 2020. But we were still targeting positive free cash flow in 2021. We have many levers we can pull to preserve cash. Let me highlight just one. On the current schedule, our total spending for GoGo 5G peaks at just under $50 million during 2021, with about three-fourths of this spend in CapEx during that year. We are very enthusiastic about the prospects for GoGo 5G, but the pace and number of towers we deploy is within our control and could be varied as may be required by external circumstances.

37:46 In this context, the 2020 guidance we would have provided on this call without the impact of coronavirus is summarized as follows. Total consolidated revenue of $830 million to $875 million, reflecting the absence of $35 million in nine recurring CA revenue we saw in 2019. We expected service revenue to be higher in the second half of 2020 versus the second half of 2019, including growth in CANA, as the underlying growth is no longer masked by American Airlines Deans calls. We expected CANA revenue of $350 to $370 million with approximately 5% from equipment revenue. We expected CARW revenue of $165 to $180 million with 40% from equipment revenue. We expect BA revenue of $315 to $325 million with segment profit in the mid to high 40% range.

38:51 We would have provided adjusted EBITDA guidance of $120 to $145 million. Finally, we expected an increase in 2KU aircraft online of 325 to 375. Again, we believe we were set up for a very solid year, and our financial performance was ahead of our internal plan for the first two months of 2020. We will plan to provide an update on our outlook on our first quarter earnings call or earlier if appropriate. As I conclude my prepared remarks, I want to join Oak in thanking our employees for their contribution to our strong financial results in 2019. We know that as we look forward, we have our work cut out for us as we face a new set of challenges none of us could have predicted.

39:39 We are grateful for your extraordinary talent and commitment as we face them together. Operator, we're now ready for our first question. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To answer all your questions, press the pound key. Our first question comes from Scott Serrell of Roth Capital. Your line is now open.

40:01 Hey, good morning. Thanks for taking my questions. Oak and Barry, great job in the fourth quarter. I know it's an unprecedented environment that we're operating in, so we really appreciate The thoughtful commentary both to the business, the industry, and really appreciate the transparency. Barry, just quickly, in terms of gross margins within CA services, it looked like it was down. I was wondering if you could clarify if there was anything going on there. And then if I could, on the CA side of the business, can you give us some idea in terms of what subscriptions revenue looks like relative to one-time usage? and maybe give us an idea of what the real-time ARPA per plane is looking like on a daily basis to help us kind of calibrate the impact that's ongoing. And lastly, if I could, on the BA front, continues to do extremely well.

40:47 It seems like it's unfazed at this point in time. I was wondering if you had any additional color related to traffic patterns with private jets in general that you're seeing on that front. And remind us in terms of some of the contracts, because it's subscription-based, You know, what historic churn maybe has been, what cancellation policies look like, because it still looks like that business is pretty healthy. And I know the parallels early in terms of international travel in the Asia-Pacific region were still strong and actually increasing. Wondering if there's been any near-term impact on that front. Thanks, and I apologize for the lengthy questions.

41:21 Yeah, I'll try and take a couple of those, and I'll turn it over to Barry for the margin question. We don't – I mean, in terms of ARPA per aircraft – I can't really give you that for this week. The way our reporting works is we don't get that on a daily basis. We should, but we don't. I noted the trends this week. We see our big airline customers in the U.S. down around 15%. Yesterday's numbers, we're off that a little bit. It's interesting, take rates. Yesterday, take rates were quite high. flights were about even with the week before.

42:07 But I suspect load factors were much lower because revenue was down. So that's kind of current view of what's going on in the North American market. You asked about business aviation. We actually have been talking to our charter customers, as well as some of the fleet operators. You know, there have been a few cancellations on the corporate side because, you know, events are being called off, et cetera. And there's been a sort of a pickup on what I call the personal side of people needing to get from point A to point B and not wanting to take commercial airlines or unable to take commercial airlines. So that's that one.

42:56 You had ARPA, you had BA. What was the one on the Pacific? I'm sorry, your Asia-Pacific question.

43:03 Sorry, that was more related to just the parallels in terms of traffic, how it trended early on with the coronavirus spread there, but you already addressed that. Just one other, if I could, on the BA side. So is the business now segmented? I know you're trying to provide more transparency and clarity in terms of corporate overhead, but is the BA business segmented? segmented that it could actually easily be split at this point in time in terms of your additional costs and satellite costs, et cetera. And then, again, just for Barry, gross margins on CA North American

43:34 services. Yeah, we'll go back to the gross margin point in a sec. Yeah, VA, now we've moved the whole ATG network into the BA segment to run out of business aviation. So, you know, it is a self-contained unit at this point and could be, you know, split off quite easily. We did that so that we could demonstrate the value of the two businesses in a pretty clean way. I'll turn it over to Barry to talk about the gross margin at CA.

44:04 Yeah, Scott. The primary drivers in CA North America was an increase in the dollar spend in SATCOM. The actual department costs came down as we described in conjunction with our overall IBP plans. I would say, just as a reminder, the SATCOM Cost overall came in well below budget, as I highlighted in the prepared remarks. But for the fourth quarter, the dollar amount increased as expected for that period of time. There's some lumpiness in the timing of those increases in SATCOM, so that's what was reflected primarily in the fourth quarter.

44:44 I'll follow on with one point on the agent traffic. We saw an impact there early on with the Hong Kong protests last year. Some of that lingered into early this year. The Japanese traveled down a lot starting the last week of February and into early March, like down 50% inside. This is travel within Japan. Interestingly, now they're starting to open up travel within China. If you can believe the statistics from China, they've done The number of new cases is down way, way, way down, and the number of deaths is way, way down. And so we are hearing rumor, actually, that they are starting to fly again in China.

45:31 So, you know, it might be a little sprig of green hope that travel markets can rebound.

45:43 Great. Thanks so much. Nice job.

45:46 Thanks, Scott. Thank you. And our next question comes from Simon Flannery of Morgan Stanley. Your line is now open.

45:55 Thank you. This is Landon Park on for Simon. A couple questions for us. Can you run through maybe on the revenue side on CA, what is your, you know, fixed versus subscription revenue or fixed versus variable revenue on that front? And as well on the cost side, maybe can you size your fixed versus including how much contracted Satcom costs you have for 2020. And then just lastly on Delta, is your base case assumption at this point that you will begin to lose your sole provider status with them? And to your knowledge, are you still in the running for the A321 Neo Award?

46:43 Okay, that's a lot of questions, Landon. Let me start with the Thank you very much. Thank you. Travel's impacted for a long period of time, and people don't see any value in having those passes. So I don't think we can take some comfort in that some of that will persist, but we could see drop-off in that as well.

47:28 And that's in our planning right now. Second question, I believe, was variable versus fixed costs. Our biggest counterparties are obviously airlines and satellite companies. One can look at the satellite contracts and think they're fixed, but they also can be renegotiated. We've identified 16 levers of cost control that we're working here. Counterparties is one of them. We are... very valuable customer to the satellite companies. We are the largest customer for a few of them. We are the fastest growing customer prior to coronavirus and we will be the largest customer and the fastest growing after coronavirus passes.

48:18 So there's a lot of incentive for them to work with us to help us get through this pandemic. On the airline side too, we have a lot of subsidized equipment deals and other things and you know we will be going back to airlines and asking for ways to restructure our contracts you might say well why would they do that well you know like I said in my comments IFC at a number of airlines is the number one driver of how their net promoter scores go or their customer satisfaction scores go so it is actually very important and I think that airlines view it as being very important that they're and the biggest supplier of ISC remain healthy.

49:04 So we will be talking to them as well. So there is counterparties that are going to be involved in our cost reduction plans. And so I think that is a way to look at our cost structure and say, okay, it's fixed, but one can modify those arrangements. The last part of your question, Landon, was on Delta. Look, there have been no decisions made, but we know that they have let us know that they may consider that. So we wanted to make sure the markets knew that. So I think that's, you know, I'll just put that out there. I think we are, you know, we have a contract that goes through 2027. And there are some outs in those contracts for Delta but we think we have solid arguments as to why those would not be valid. They probably have arguments why they think they would be valid. So it's a negotiation.

50:03 Delta wants to tremendously increase the amount of capacity they're going to be using. I think they're going to want to have a competitive situation on the supplier side so they can make sure they're getting competitive pricing and and service levels, and they want to change our contracts as they go free. They have to. The turnkey contract doesn't contemplate free. We want to grow our financial relationship with Delta, and we'd like to get out of hemorrhaging cash on equipment sales, which we do with Delta. So everybody wants something, and it's a negotiation, and I think in the end it'll benefit both parties.

50:48 Thanks. Just two quick clarifications. Can you tell us what your current contracted SATCOM costs are for 2020? I assume it'll be in the K, but if you can give us that color. And then on Delta, are you, understood on the existing contracts, but are you still in the running for new awards, or is it your sense that that is no longer the case?

51:13 Yeah, well, I mean, right now, We're planning to be line fit on the A321 when the first one rolls off at Airbus.

51:26 And on the SATCOM costs?

51:27 Thanks, Landon. SATCOM costs, I mean, I don't know if we put out the exact number. We do put out the commitments in the K or in the proxy, but they, you know, it's a percentage. of what we expect. We expect our spend, you know, we're managing that very carefully right now. So commitments and actual are probably right about the same

51:52 at the moment. Yeah, there are also some contracts expiring during the course of the year. So as Oak described, you know, we're seeing very substantial reductions in price when we renew those contracts. So we'll certainly be having those conversations with the satellite providers. But the number that are expiring and up for renewal on the order of Thank you. And our next question comes from Lance Atanza of Cowan. Your line is now open. Hi, guys. Thanks for taking the questions.

52:39 I'm trying to get at the relationship between declines in commercial airline traffic and what we should expect in terms of your declines in commercial airline service revenue. So I appreciate the answer that you gave a second ago about the 25% monthly passes versus 75% in-air purchases, but I want to try to come at it a little bit of a different way. First, I guess... can you tell us what the percent of revenues that are coming from airline directed versus turnkey contracts and then really within each of those or perhaps it's only in the airline directed contracts, what if any percent of your service revenues are being paid by the airlines sort of as flat fees irrespective of flights, passenger load, passenger data usage, etc.?

53:35 ? or is the answer that virtually 100% of your service revenues are going to vary directly with airline passenger traffic?

53:47 Let me come at your question first at kind of a macro level and kind of what is the impact overall to us and how much of that flows through. So we are doing a lot of scenario planning on this, as you would imagine, I mean, I'll give you a couple of bookends here. So, for example, one of the scenarios that we're planning is if you look at Asia traffic being down by about 60% and you look at the rest of the world being down by about 25%, so that includes CONUS, Canada, Europe, for the rest of the year, so for the full year, those very significant percentage declines, that creates about a $70 million kind of hole on the cash front. Alternatively, if there were no revenue from CA for three to four months, it's a similar $70 million hole. So we have identified opportunities for cash savings that, as I've mentioned, we have these 16 levers that we've already identified the pool. Those amount to more than $50 million.

54:50 As you all said, some of those require negotiations with counterparties, so we want to be clear about that. But we are very actively managing our way through that. Importantly also, we had the cash increase from the end of the year to yesterday at now $204 million, and we have the ABL of $30 million that's undrawn. So that's the way we're thinking about it. More specifically on your question about in the short run how much of that revenue decline You know, it's a very high percentage in the short term because of the relative fixed costs of that satellite spend. But having said that, those are some of the conversations that we want to be able to have is to help have the discussions with our partners to ensure that we're all kind of sharing in the pain here.

55:43 Right. And like Barry said, you know, that's one scenario. We're also, you know, developing plans for margaritonian scenarios if they should emerge.

55:54 Well, that's really helpful, guys. The $70 million is the cash shortfall. Is that versus your previous model? Or when you say $70 million whole, do you mean that you would be and many more. and many more.

57:03 monthly revenue guarantees in some of our contracts, but not a lot. And in more and more recent contracts, we have been negotiating monthly revenue guarantees. We do have one relatively new contract, which is a flat fee CIR contract. But a lot of the revenue we get, it does depend on in-flight connectivity sessions or use of our GoGoVision product. or free messaging usage, et cetera. We have some of our free messaging. It is on a per-passenger boarded basis. Again, that's not a huge amount.

57:44 Okay, and just one last question for me on the Delta dual sourcing front, and I apologize if I missed this on your last answer, but would this refer only to new planes or is there some thought that Delta could – and some of the existing GoGoJets like what happened with American Airlines a few years ago?

58:08 Yeah, it's not like the American Airlines situation in that the American Airlines contract was a lot different from the Delta contract and was frankly close to the end of the contract as well as the fact that we didn't have really a mature satellite product at that point. And now we've got 2KU and I think The 2KU is as good or better than any other IFC product in the world right now. So the situation is a lot different than America. I'm not going to comment on what Delta's plans are. I will say this applies to the domestic fleet. I'm going to leave it to Delta to talk about their plans.

58:56 Right now, frankly, nothing is decided. You know, I would be making things up if I gave you an answer, and I don't want to do that.

59:05 No, but that's helpful. Thanks, guys, very much. I appreciate it.

59:08 Excellent. Thank you. And our next question comes from Philip Cusack of J.P. Morgan. Your line is now open.

59:17 Hey, guys. Thanks. Oh, can you talk more about industry consolidation, and are you considering selling parts of your business as well as buying or merging with other things? Thanks.

59:30 yeah I mean I would say everything's kind of on the table because these are dynamic times and industry needs to see some consolidation and there's a lot of conversations taking place between different players in the ecosystem some people looking at more vertical integration plays some people are looking at more horizontal integration plays so you know we We do think that CA business does need to see some consolidation, and we think that GoGo, by virtue of our market share, by virtue of our really strong distribution, product roadmap, engineering, systems integration capabilities, et cetera, is a very important component of the industry and would be of a lot of value to somebody who really wants to be a big player in the industry. So that's how we look at it.

1:00:24 I think... I don't want to mislead people into thinking that there's anything imminent going on, but there is a lot of conversation taking place.

1:00:35 Okay, thanks. And then second, on the 125 to 140, or was it 120 to 145, that you would have guided to, is that a clean comp versus the 115 in 2019? What are the puts and takes there? Thank you.

1:00:52 Yes, Phil, it is a clean comp in the sense that it does not include recurring revenue. So that benefit that we saw in 2019 is excluded. So, of course, that takes the 146 from 2019 down to the 115. So the 120 to 145 is what we would have guided to just on a straight-up basis coming into the year. Okay.

1:01:17 Thanks, guys. Thanks, Phil. Thanks. Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Oakley Thorne for any close remarks.

1:01:31 Thank you. Thank you for attending our Q4 2019 earnings conference call. And as we've pointed out, you all know, we're in very uncertain times. We expect revenue to fall pretty dramatically, as we said, until the pandemic has passed. But we start with a strong cash balance. and we feel we have identified levers that if we execute will allow us to reduce cash spend in concert with revenue declines and to maintain our liquidity. Underneath it all, we have two very valuable businesses in growing and underpenetrated markets and we're determined to realize the strategic value of those businesses for our shareholders and employees. So thanks again and we look forward to talking to you in the future. Ladies and gentlemen, this concludes today's conference call.

1:02:16 Thank you for participating. You may now disconnect.