Gogo - Earnings Call - Q1 2020
May 11, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Q1 twenty twenty Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. 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.
Speaker 1
Thank you, Dylan, and good morning, everyone. Welcome to Gogo's first quarter twenty twenty 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 caption Risk Factors in our annual report on Form 10 ks and 10 Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is 05/11/2020. 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 the call, we'll present both GAAP and non GAAP financial measures.
We include 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.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q and A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.
Speaker 2
Thanks, Will, and good morning, everyone. I'm not going to spend a lot of time on Q1 twenty twenty as people are far more focused on our response to COVID-nineteen than they are in 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 ahead 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, revenue and gross profit. I'm going leave most of the numbers to Barry, but share a few that demonstrate the drop off in our March business. In our CA North American segment, service revenue averaged $28,000,000 per month in January and February and fell 35% to $18,000,000 in March.
ARPA fell 36% from January and February to March, and gross passenger opportunity fell 18%. In our CA Recta 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 US and rest of the world and carried through April.
And 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 a 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 market 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. Air travelers were down 95% in April from 2019 levels. IATA projected global airline revenues will be down $314,000,000,000 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 April.
And Serium, a consulting firm that tracks 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 corresponding impact in Gogo has also been dramatic. In April, our commercial aviation segment's flight counts were down 73% versus prior year.
And 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 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 12. Because of the dramatic reduction in flights, many aircraft owners, this is in BA, parked their aircraft in the March time frame. And approximately 30% of our 5,700 ATG accounts took some action to reduce their spending with Gogo, including nine forty account suspensions and more than seven fifty 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 reinstatement. All that said, looks like we bottomed out 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 VA, the green sheets 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 for a 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 nine eleven because the airline industry is much more sophisticated in managing its product and marketing its product than it was fifteen, twenty years ago. On the business aviation side of our company, many industry experts are saying that COVID-nineteen 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 phased reentry into our business aviation headquarters in Broomfield, 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 adapting to 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 US and a three month ground stop in the rest of the world. This 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 preexisting orders. The fourth, fifth and sixth levers are travel, marketing and nonessential 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 five gs and Ka initiatives, where in our best case scenarios, we do not trim expenditures at all. And 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 was to delay merit increases for 2020, which has also been completed. The twelfth was a hiring freeze, largely done except for critical backfills. The thirteenth was reducing contractor headcount, which is largely complete. The fourteenth was salary reduction, 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 fifteenth is the furlough program, which also went into effect last week, approximately 54% of our workforce.
And finally, the sixteenth 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. Our best case scenario, these reductions save us roughly $170,000,000 in cash between now and the end of twenty twenty one. And in the worst case scenario, they save us $330,000,000 in cash over that same period. We believe these savings should be adequate to tide us through to 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 consumer concentrate a little customer concentration, an underpenetrated 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 five gs. 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 ISC 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 Gogo 2Ku. 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. On the multi orbit front, Gogo's unique 2Ku mechanical phased 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 the consolidation is overdue in the CAISC 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 the 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. Fragility Department under the CARES Act, which provides two potential opportunities for Gogo to receive assistance. The $32,000,000,000 short term payroll protection grants for air carriers and contractors and the $29,000,000,000 in loans and loan guarantees for air carriers, including Part 145 repair stations like Gogo. We applied for $81,000,000 under the grant program and $150,000,000 under the loan program and have 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 30.
With that, let me turn it over to Barry to do the numbers.
Speaker 3
Thanks, Oak. Given these extraordinary times, we thought quarterly comments to begin with the questions on the top of everyone's mind. I'll start with the financial impact of the COVID-nineteen pandemic on our business, then move to a discussion of the financial implications of our scenario planning, and I'll conclude with an abbreviated review of our operating results. Some important context for determining Gogo's ability to weather the COVID crisis is understanding our financial position coming into it. Over the course of the previous year, Gogo had strengthened in two important ways.
First, the business was finding its financial and operational footing. And secondly, we were in a much stronger cash position than anticipated. As Oak described, the first quarter results represent a tale of two quarters. Through February, adjusted EBITDA was $13,300,000 ahead of our internal budget and consolidated service revenue was also running ahead of plan. Driven by the strength of the first two months, consolidated adjusted EBITDA of $25,700,000 for the full first quarter slightly beat our internal budget.
This was in spite of the dramatic impact of the coronavirus pandemic during the third month of the quarter. We believe the operational and financial discipline underlying these results provides an important foundation to build on once things begin to normalize. Even more important than this operational foundation is the company's strong liquidity position exiting 2019 and continuing through the first months of this year. You'll recall that we significantly overachieved our free cash flow objective last year as we improved free cash flow by $163,000,000 in 2019 versus the at least $100,000,000 improvement we had targeted going into the year. This was the result of lower investment in airborne equipment, adjusted EBITDA coming in well ahead of plan during 2019 and improvements in other working capital, primarily accounts receivable.
We continue to build our cash balance through the first four months of this year from $170,000,000 at the end of twenty nineteen to $211,000,000 at the April. The 2020 figures include $22,000,000 in proceeds from our ABL drawn in March. Excluding this additional liquidity, cash increased by nearly $20,000,000 since the end of the year. Without the cash flow overachievement throughout last year and the first quarter of this year, our cash position would have been approximately $130,000,000 versus the balance of well over $200,000,000 after the April. These strong cash balances position us well to achieve the first two financial objectives Oak described, which we set for ourselves as we began planning our response to the pandemic.
First is maintaining the minimum liquidity we need to run the business, and second is meeting the interest obligations on our debt. We are current on our interest payments, including $45,700,000 paid on May 1, and we are in complete compliance with all of our debt covenants. Now I'd like to expand on the operational planning approach Oak described, focus on the financial and liquidity implications for Gogo. We started by establishing best case and worst case scenarios and then went through a detailed bottoms up planning process to quantify the levers required to save sufficient cash to achieve our liquidity objectives. We brought a very sober minded approach to this process.
Oak described the worst case scenario and the 16 cost saving levers in some detail. Even our best case scenario reflected a very severe impact on our industry. For this case, we divided the world into eight segments, and we modeled passenger declines of at least 90% in six out of eight of these segments. We're taking a very dynamic and conservative approach to planning in this period of high uncertainty. While we are seeing some green shoots, we are fully prepared to execute on the actions mandated by our worst case scenario, and we continue to update the scenario as new information comes to light.
Let me dimensionalize the 16 cost levers a bit more from a financial point of view. To reiterate, the reductions we've identified drive roughly $170,000,000 in savings during 2020 and 2021 in the best case scenario and $330,000,000 in a worst case scenario over the same period. The cost reductions are also front end loaded with the overwhelming majority coming in 2020. Approximately three fourths of these cost savings are either directly in our control or savings where we have already reached agreement with the requisite counterparty. The three primary counterparties include airlines, equipment suppliers, and Satcom providers.
Importantly,
Speaker 2
we
Speaker 3
have agreed with our airline partners to significantly delay installation. This action represents very significant cash savings to Gogo between now and the end of twenty twenty one. We have already renegotiated our purchase commitments to align with these installation delays, reducing our 2020 expenditures by at least $80,000,000. Netting the foregone airline proceeds we would have received for these installations, these delays represent approximately $40,000,000 in net cash savings to Gogo during 2020. As Oak described, we've also made very good progress with our satellite partners.
We are papering the agreements we've reached with over half of them, and the majority of the rest are in the final stages of negotiation. If necessary, there is also a substantial amount of program spending we could reduce. Gogo five g is the most significant of these. We expect to spend approximately $100,000,000 in combined OpEx and CapEx for Gogo five g, with CapEx comprising approximately two thirds of this total. On the current schedule, our spending for this program peaks at just under $50,000,000 during 2021.
We could delay our Gogo five g spending if required to meet our financial objectives. So what is the outcome of these detailed planning exercises? Even under the worst case scenario, we meet our key financial objectives of maintaining the minimum liquidity we need to run the company and making our interest payments. Interestingly, under the more optimistic scenario, our cash balance at the end of twenty twenty actually increases by about 10% versus our original budget. This is because a significant portion of the cost savings take hold this year, and we also benefit from the ADL proceeds.
Under the worst case scenario, cash declines more steeply in 2020 than originally budgeted, but we achieve approximately breakeven free cash flow in 2021 because a significant portion of our cost structure is sized to match the revenues. Of course, this free cash flow metric includes making our scheduled interest payments. Let me offer two other data points which corroborate our expectation of maintaining adequate liquidity through this crisis. First, for the purposes of our first quarter twenty twenty report on Form 10 Q, which we are filing today, we have concluded and our auditors have agreed that we do not have substantial doubt about our ability to operate as a going concern. As you know, the accounting rules require that this assessment be made at the time a periodic report is filed with the SEC and to the twelve month period thereafter, which would be through May of twenty twenty one.
Secondly, Moody's recently issued a statement with a stable outlook. Moody's stated their expectations that, quote, Gogo's cost savings initiatives will help the company mitigate the impact of the disruption caused by the coronavirus on its EBITDA and that the company will maintain adequate liquidity over the next twelve to eighteen months, end quote. Importantly, our financial planning does not assume any benefit from government funding, although we have applied for an $81,000,000 grant and a $150,000,000 loan under the CARES Act. We've not yet heard whether we will be allocated any of this capital. We would hope to hear a response within the coming weeks.
And as we do, we will respond accordingly. I'll now turn to a discussion of our first quarter operating results, beginning at the consolidated level. Total service revenue was $150,800,000 for the first quarter, down 9% over the prior year period. This was driven by a 23% reduction in service revenue in March versus the average for January and February, reflecting the impact of COVID-nineteen. In spite of this revenue decline, we recorded adjusted EBITDA of $25,700,000 for the quarter, which was well above consensus estimates.
Free cash flow was solidly positive at $22,700,000 for the first quarter. This was an improvement of $57,000,000 year over year, but a large part of this improvement was due to the shift in the timing of our interest payments as a result of the refinancing completed in May of twenty nineteen. Adjusting for the impact of this change, free cash flow improved $11,000,000 from the year ago quarter. For clarity, let me summarize the impact of the COVID pandemic on this quarter's financial results. In addition to the low team, One affected adjusted EBITDA and the other two are excluded from adjusted EBITDA.
The first item
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was a
Speaker 3
charge of $6,800,000 for credit loss reserves, the majority of which was related to a single international airline partner, which went into administration during April. This charge is reflected in our G and A expense for the quarter. Adjusted EBITDA would have been $32,500,000 without this charge on par with the fourth quarter, and this is in spite of the significant revenue impact of COVID in the month of March. We also recorded two asset impairment charges totaling $49,400,000 during the quarter, which were largely related to COVID-nineteen. First and most significantly, we wrote down airborne lease assets by 46,400,000 for three airlines where future cash flows are not expected to exceed current book value.
These are airlines operating under the turnkey model under which we carry assets on our books. And it primarily affected agreements, which include significant equipment subsidies, which have been offered in years past. COVID negatively impacted our assessment of the revenue from these airlines resulting in an asset impairment charge this quarter. The second impairment charge was a $3,000,000 write off of an investment in a technology development company made in 2017. The company had recently come to terms to be sold at a price which would have resulted in a profit to go, the sale was canceled due to the pandemic, which forced the company into administration.
I'll now discuss the operating results for our business segments, starting with business aviation. VA posted another great quarter. Service revenue increased 8% to $57,700,000 with units online increasing 7% to 5,713 and ARPU increasing 2% over the prior year period. During the past two quarters, VA has grown ATG units online by 19% cumulatively on the strength of the Advanced product line. Total revenue increased 1% to $70,900,000 as equipment revenue declined 24% over the prior year period.
This decline was due in part to the record equipment sales we achieved in the fourth quarter, which included higher year end purchases by our dealer channel. BA achieved $35,900,000 in segment profit for the quarter with a record high 51% segment profit margin. This was driven by a five percentage point increase in service revenue margin over the prior year period. This record segment profit margin was in spite of $2,100,000 in operating expenses incurred for the development of Gogo five gs during this quarter. Now let's turn to a discussion of our Commercial Aviation division results, starting with CA North America and rest of world on a combined basis.
CA in particular represents a tale of two quarters. Combined service revenue for the month of March was down 34% versus the average for January and February, and the ARPA results followed a similar pattern. For the first two months of the quarter, CA NA and CA ROW generated nearly $10,000,000 in combined segment profit, significantly exceeding plan. CA incurred an $11,000,000 loss for the last month, resulting in negative $1,500,000 in combined segment profit for the quarter as a whole. We increased 2Ku aircraft online by 104 during the quarter as installations were generally on pace with the levels of 2019.
As we've discussed, a major source of cash savings in our COVID-nineteen response plan comes from the delay in two Ku installations we are planning with our airline partners. As a result, we now expect installations for the balance of the year to be minimal. We also continue to monitor the number of parked aircraft and those that may come out of service as these actions could affect the number of aircraft online. CA North America total revenue declined 17% to $80,100,000 and service revenue declined 20% over the prior year period, reflecting the impact of COVID-nineteen. The year ago quarter included approximately $7,000,000 in nonrecurring product development revenues as well as the impact of the American Airlines business model shift and the deinstallations.
Excluding these two factors, revenue was almost flat over the prior year and would have grown but for the impact of the pandemic. CA NA segment profit declined by $15,000,000 from the prior year, driven by lower service revenue. The impact of this revenue shortfall was significantly mitigated by a 32% reduction in operating expenses, including ED and D, sales and marketing, and G and A over the prior year. This demonstrates the financial and operational discipline being exercised across the company. CA NA aircraft online increased to 2,480 at 03/31/2020 from 2,412 at 03/31/2019.
This increase in AOL was despite the planned removal of a 103 older mainline ATG aircraft, which occurred in the last three quarters of twenty nineteen. The CA ROW business posted total revenue for the quarter of $33,400,000 an increase of 1% over the prior year period. Service revenue decreased 3% to 19 fully offset the impact of COVID nineteen. Equipment revenue increased 8% versus a year ago. ROW segment loss was $17,000,000, a modest improvement from a year ago.
Our substantially improved equipment margins would have narrowed this loss further, but this quarter's ROW segment profit includes $5,400,000 of the charge for credit loss reserves I previously described. Excluding the impact of these reserves, which are largely related to COVID nineteen, segment loss would have improved 36% over the prior year period. ROW aircraft online increased to 833 at 03/31/2020, up a 192 or 30% from 641 at 03/31/2019. ARPA declined due to the increased mix of aircraft from unseasoned airlines and the impact of COVID nineteen. ARPA for the month of March was approximately 30% lower than the January, February average as we began to see the impact of COVID during the last month of the quarter.
As I conclude my prepared remarks, I want to emphatically reaffirm our commitment to successfully steer Gogo through these times. Of course, the impact on the aviation industry has been dramatic, and we are swept up in these challenges. But we have worked very hard to bring an objective perspective to this situation, have developed 16 levers we can pull to significantly reduce costs, and we are executing on these plans. And there's more we can do if necessary, both operationally and strategically. We will size our cost savings actions to match the magnitude of the COVID impact as it unfolds, and we will continue to press forward with the industry consolidation opportunities we see in front of us.
I also want to join Oak in thanking our employees for your courage, commitment, and creativity in addressing these challenges. You have brought real solutions, are reinventing processes, and your can do spirit is inspiring. And you're doing it all while working remotely. Thank you again. Operator, we're now ready for our first question.
Speaker 0
Thank you. I show our first question comes from the line of Philip Cusick from JPMorgan. Please go ahead.
Speaker 4
Hi, thank you. Oak, we've been talking about M and A in the space since you came back as CEO and for a long time before. Does this crisis create any urgency for strategic decisions? And do vertical or horizontal seem more viable today? Thanks.
Speaker 2
Yeah. I think, you know, people's revenues are down, in the IFC space. And I think that that accentuates the issue of scale. And I think that, you know, it makes it to lay bare the fact that that nobody has scale horizontally. Vertically, people are also obviously taking a hit on the reduction in IFC, spending people like Us and other service providers coming to satellite companies and and looking to share in the pain, if you will.
But it remains an attractive market for both satellite operators and service companies in the long term. And I think that the opportunities created by combining in terms of scale are highlighted by the fact that your revenues are down. You combine, you've got more revenue and you combine cost structures, you know, makes a lot of sense. So I I think if anything, it accentuates it. I wouldn't wanna speculate whether vertical or horizontal are more likely.
I think there's a lot of industrial logic for either, to be honest. And, obviously, I think there's a lot of conversations taking place right now. And I think it'll all come out in the wash in terms of what makes the most economic sense to the boards of various companies involved.
Speaker 4
So just to push back a little bit, the satellite ecosystem is beaten up. There's not a lot
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of equity value there.
Speaker 4
The IFC space is beaten up. I can't imagine that a lot of airline suppliers are feeling great right now.
Speaker 2
How do you actually get
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anything done here? Or does somebody have to to just come in with new capital to roll the space up?
Speaker 2
Well, first of all, all valuations are relative. So if you're looking at stock merger opportunities, that type of thing, and everybody's stock is beaten down, that helps to some extent. And also, frankly, in our case, I think the public markets don't really understand the value of the company, and I think strategics do. I think that there's just a dislocation there. Hopefully, we would look for some adjustment, that dislocation is part of the deal.
Speaker 3
Okay. And one more if I can. Any update you can give
Speaker 4
us on the satellite deals? You said half or close to signing something new. What kind of pricing could you see out of that? And then also, are you concerned about availability over time? Are there any changes in construction or launch timing coming?
Speaker 2
I would say this. In terms of structural price reductions long term, we see that coming as new launches take place. And obviously, we're still talking to our various providers about their launch plans. And most launch plans appear to be sort of on track or delayed by months, not years. In terms of the the breaks we're getting, you know, it's a sharing in the pain.
So it's, you know, it's kind of what what we're getting from the satellite companies is, look. Okay. Well, if your revenues are down here, we'll share in that pain here. But that's not gonna those deals won't be long term. And now if we recover, they're gonna go back to the pricing they were getting from us, you know, before COVID.
So I would say there's really two things to think about. One is, helping Gogo get through this period when demand is way down. And that's not long term structural, I don't think. And then on the other side, what is structural is that as new satellites go up, pricing's coming down dramatically. I think in the last call, I talked about the number of contracts we have up in our rest of world segment over the next three years.
And it's something like 60% or something like that. And all of those are rolling over, and they're gonna be in much cheaper satellites going forward. And that's, I think, more where the structural pricing change takes place that will improve our economics over the long term.
Speaker 3
Thanks, I'll see you soon.
Speaker 2
Thanks, you bet.
Speaker 0
Thank you. Our next question comes from Rick Prentiss from Raymond James. Please go ahead.
Speaker 5
Yes, good morning. First I hope, you, your families, employees, friends all stay okay during this crazy time.
Speaker 4
Thank Doing
Speaker 5
a lot through it. Wanted to circle on some of Phil's comments then. You mentioned salary contracts would not last a long time, help you through the period. How should we think about when do you know are you headed towards the best case? When do you know you're headed towards the worst case?
What are kind of the intermediate steps that kinda let you know which path we're on?
Speaker 2
Yeah, Rick. You know, it's all frankly tied to flights, load factors would be the two biggest drivers. We actually we don't stay locked into our best and worst either because circumstances have changed a lot. And if one stayed locked in, what one would have thought was the worst case eight weeks ago would look like a very rosy case today. So we we consistently are revising and trying to develop new scenarios that might be worse than worst case, etcetera, etcetera.
So we we have to stay flexible in that regard. Kind of the structure for how we go about planning and the 16 levers remain consistent across all those scenarios. But we just obviously pull them to different levels depending on the scenario. So to us, the big thing are the return of passenger traffic and the things that will drive that. You know, we've seen very high take rates during the crisis, but there haven't been many passengers, so it's not very meaningful.
You know, if we can if we can hold on to, you know, I'm probably won't hold on to the as high as the take rates are today because of the fact that that that, you know, flight attendants, for instance, were all online, and they are not they're not gonna increase the number of flight attendants on flights as flights come back. But, you know, if we can if if more people will use in flight connectivity when they come back because they're more used to being connected, they've been working online from home now. Everybody's connected at this point, it seems. I think that people are gonna wanna be connected when they fly. So we expect the take rates to be up.
And if passenger traffic comes up, we think that'll be the key trigger for us in terms of understanding how much we have to cut and when.
Speaker 5
Sure. And obviously a lot of moving pieces here on the salary cost, the furloughed employees, and compensation reduction. Any thought about providing quarterly guidance given how many moving pieces there are, but not much clarity on the full year?
Speaker 2
Yeah, I think, you know, we thought about it for this quarter and there were just still too many moving parts. I mean, some of the green shoots I talked about, in my script literally, you know, appeared last week. So things are happening and the situation is changing. It's very dynamic. As soon as we sort of think we've got a clear path, a view of what's gonna happen, I think we'll go back to giving quarterly guidance first and then probably back to annual.
Speaker 0
At some point.
Speaker 5
Okay. And you gave A little bit of color on April. Any thoughts about how we should think of overall revenues or EBITDA performance in April if that does prove to be mid April was kind of a low point maybe?
Speaker 2
Yeah. You can pretty much nail the low point at April 12. That was the lowest day for our business aviation flights, and I think that was the lowest day for passenger count on our airlines. In terms of guidance around that stuff, I'm gonna turn it to Barry because he does the numbers.
Speaker 3
Well, Rick, as you know, it's just very difficult to predict at this point. So I think we would just be getting probably too far out over our skis to offer too much about that. But to your question about quarterly guidance, I think as the situation does stabilize, which we hope to see beginning to happen in this quarter, it may make sense for us to provide quarterly guidance. And I would just underscore the point Oak made about this being a very dynamic planning process, and we are continuing to work the scenarios real time as the information comes in. So I think as that finds its footing and as if we begin to have some better view of the future, we would be able to give some guidance, you know, in the short term and and, you know, out of time.
The BA business, would just comment, is under the same general, part of COVID, obviously, but not nearly the same effect. And also the the drivers of, like, coming out, we think, gonna happen more quickly. So I think we also monitor the differences in those very carefully. And so as we look forward to what VA and CA look like over time, you know, you may be able to to think about those differently too.
Speaker 5
Great. Thank you.
Speaker 2
Yeah. I think we yeah. Well, I think we aim people to say that we thought April revenue was down 80% in our CA business. And, you know, it's coming back a, you know, a bit, Rick, now, but, you know, it's hard to tell, you know, how fast that'll come back. VA, on the other hand, we talked about the suspensions.
Those obviously will hurt revenue in April, but we've already had a pretty big comeback in terms of the number of suspensions being reactivated. A suspension normally, if somebody goes in for maintenance and they wanna turn the service off for a month, and we let them do that, that usually runs like 40 a month. We all of a sudden, we had 900 something in March, April time frame, 200 of which have come back, mostly in the last week. So it's very hard to predict. If that rate continues in terms of reinstatement, April could be impacted, but May may pick up pretty good and June could be back to normal.
But it's hard to predict if that pace of reinstatements will continue or not.
Speaker 5
Makes sense. Thanks, guys, and good luck as we make it through this.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from Lance Sitanza from Cowen. Please go ahead.
Speaker 6
Hi, guys. Thanks for taking the questions. I wanted to focus on liquidity. I have a few questions there. First, maybe just an easy one.
The $20,000,000 I think you called on a $20,000,000 increase in cash pro form a for having drawn the revolver from the end of twenty nineteen. Was that through March 30 or was that through today's date?
Speaker 3
That was really through April, Lance. So that cash bill went from, you know, 170,000,000 to the 211,000,000 at the April. As I mentioned, we have the payments for our interest that are in May. So the first of those for $45 plus million was made on May 1, and then the payment for the convert interest is also in May. So the point we were trying to make was that the cash has significantly improved during last year and since the end of last year, in part due to the ABL, but also because of the operations.
Speaker 6
That's great. Okay. So you've said in the past, I think, that you consider sort of $100,000,000 as your minimum liquidity threshold. I'm wondering if that's still the case or if that has become a smaller number in response to changes that you may have made. And presumably, whatever your threshold is, the threshold is lower the day after you make your bond coupon.
Is that fair?
Speaker 3
Yes. Let me just clarify one thing you said there, Lance, which is we didn't really view the minimum threshold for liquidity as $100,000,000 Previously what we had said is our projections maintained liquidity above $100,000,000 We can operate with meaningfully less than that. And to your point, the minimum amount, and the requirement will fluctuate based on the timing of the interest payments. Also, expense levels change as we implement some of these cost levers. But, you know, in general, we think about targeting, at least on the order of about $50,000,000 or so for operating liquidity.
And of course, this includes making our interest payments. It's after the interest payments. So that's kind of the zone that we have targeted we go through these planning exercises.
Speaker 6
Great. Okay. So then I think, Barry, you actually, you called out, I believe it was $40,000,000 of, call it, net cash savings that I believe was related to slowing the pace of the 2Ku installs. Did that 40,000,000 include equipment revenue associated with the installs as well? Is this sort of like the all in kind of number?
Speaker 3
Yes. So the actual slowdown in purchases will be at least $80,000,000 And those are the deals that we've already negotiated with our supplier channel. And then that $80,000,000 number gets offset by the foregone proceeds from airlines that we would have received. So you're was 40,000,000, and that's just the amount for 2020. So just to clarify that.
So the the savings amounts that Oak and I both quoted in aggregate were for '20 and '21. So that 40,000,000 really comes this year, which is important.
Speaker 6
Got it. Understood. What about satellite capacity? Can you and my view is that it's a big bucket. Can you range that for us in terms of best case, worst case scenarios?
Speaker 2
The Go ahead, Oak. No. You go ahead, Barry. Well, I mean I mean,
Speaker 3
as you know, it's a single line item largest line item cost. And, you know, our our philosophy or our strategy going in is is to share in the pain. So we're really asking the SATCOMs to reduce costs commensurate with the reductions in capacity we need to satisfy demand. So but, you know, that number is, you know, it's in the tens of millions of dollars also for this year as we look to what we think is an appropriate amount. And so it's a very substantial number.
I wouldn't want to get too far over that because we're still in these conversations. But I think we've been very pleased with benefit that we've received so far. And I think the satellite companies have been cooperative. And I would just say that the numbers that we are seeing from those we have come to terms with, are at or, they're at the numbers that we have modeled.
Speaker 6
What about the five g rollout? Could you could you repeat what you said about the cadence of spending 2020 versus 2021 and and how that might be deferred?
Speaker 3
Yeah. So the total amount of spending for that program is about $100,000,000 of which twothree is CapEx, the balance OpEx. So we think about this in terms of the development costs associated with really developing the technology and then the rollout of this of the Gogo five g as we deploy the cell sites. So $50,000,000, five zero, of that is spent in 2021. So that's the peak year of spending.
So so in the likely case scenario, there's really very little delayed. But, you know, we could we could certainly delay that program. We would think about it in those two parts is, you know, in the ideal, we would maintain the development, and so we have the the technology, deployable, and then we can can easily then vary the deployment of the cell sites. And we don't have to have, of course, nearly all the cell sites up in order to get the, the Google five g experience. They can be deployed in part, and then you layer in the additional cell site deployment as required to service, the capacity needs.
So that's something that we could do. It saves meaningful amounts of cash, of that $50,000,000, really in 2020.
Speaker 6
So last one for me is on the CARES Act with respect to the $150,000,000 loan application. Your first lien note indenture, I don't think permits incremental debt of any kind at the guarantor level, whether secured or otherwise. So if the application well, first of all, maybe I'm misreading that. But if the application is approved, would you expect to just ask noteholders for a waiver? Or am I misreading the covenants?
Thank you.
Speaker 3
Well, first, we'll have to see kind of if we receive that money, how it's structured. So is it at the holdco level or at the opco level? You know, I think that, if the the debt were structured at at the, holdco level, so it was structurally subordinated to the first lien debt, you know, that's obviously, the first lien holders would be more available to that. But I think the other part about this is that by bringing in this additional buffer liquidity or helpful liquidity, think we could have a very constructive conversation with our holders around that.
Speaker 6
Thanks guys.
Speaker 2
Thanks a lot Ben.
Speaker 0
Thank you. I show our next question comes from Louis DePalmer from William Blair. Please go ahead.
Speaker 7
Hey, Louis, Barry and Will, good morning. Good morning. I hope you guys are doing okay during these difficult times. Oak, on the subject of potential industry consolidation, three of the potential horizontal consolidators use Ka band. Can you provide any more color on your comments regarding the optionality of being able to potentially migrate a 2Ku system to Ka or 2Ka?
Yeah.
Speaker 2
So we've worked with our supplier on a way to essentially pull out the disks on the top of the aircraft that sit inside the antenna terminal structure, pull up the Ku disc and replace them with Ka disc. And then there are a couple LRU boxes inside the aircraft that that would need to be swapped out as well. But, you know, it doesn't require, any real change to the structure of the aircraft. You're not taking the antenna superstructure off. That all stays the same, the adapter plate and fairings and how the whole structure is attached to the aircraft.
So it's a pretty easy conversion for those who wanna go from a Ku to Ka. So that's a new development on our part and and one we think gives us, a, a lot of flexibility with our in terms of spectrum use in the future if if for some reason, Ka ends up being a, you know, preferred band or preferred spectrum by our customers. And, also in the business combination context gives us a lot of flexibility.
Speaker 7
Thanks, Oak. And one last one for me, and this is probably for Barry. Barry, if we assume that, you know, April represents the bottom, can you estimate roughly, like, how much consolidated revenue was was down in April in terms of a ballpark percentage?
Speaker 3
Well, that was the amount for, CA, Louis. So I think, you know, probably the, you know, just the easiest way to do that is you can look at what the the normalized revenue was for the first couple of months of Jan of this year, January, February, and that that decline that we've said was on the order of 60 to 80%, would be reflected in those April numbers. I wouldn't wanna do that math off the top of my head, but that would be basically the the foundation for doing that calculation.
Speaker 2
On the CA item.
Speaker 3
Greg, that's just CA as I mentioned. Yep.
Speaker 7
Okay. So when when taking into account, if we assume, like, flattish BA, should we expect, like, a 50 year over year decline in total consolidated revenue? Or, like, do you have a a ballpark for what we should expect for, like, the trough year over year decline?
Speaker 0
Yeah. No.
Speaker 3
It's gonna be go
Speaker 6
ahead. Yeah.
Speaker 2
Well, the one thing I wanna remind you of, Louis, that these account suspensions and plan downgrades will have an impact on VA revenue. We don't have revenue for April yet, but but that'll be down. And if you think about, you know, the ATG part of our business and just, you know, you know, the numbers I shared with you and think of percentages, you know, you're you're gonna get to something close.
Speaker 7
Gotcha. And are there, I know that you've spoken a lot or you mentioned, you know, one of the international customers not being able to pay or a credit write down. What are your expectations for potential credit losses on the the business jet side for the rest of the year?
Speaker 3
We don't expect to see, you know, may meaningful credit losses there. You know, the the way the subscription business works is, you know, over 90% of the of the BA service revenues are from subscription businesses. So and, you know, the the those payments are largely made on credit cards. And so so we have just seen very, very little losses historically historically in that case. And then there are some of the the larger fleet operators, for example, in VA that are under larger that are under contracts.
And as we talked about, you know, I think that people are gonna wanna be using the the business jets, particularly as this as we come out of the coronavirus situation. So we we really don't expect to see meaningful credit losses there. The exposure is on the CA side. And so as we mentioned, that was from one international airline partner that went into administration, you know, that we could see more losses, credit reserves taken, for on the CA side as we go forward if the the situation deteriorates. There's the new standard now, as you know, requires you to assess, the the situation and to take those losses currently as opposed to waiting until they happen.
So, so it's based on the assessment. So as we do that assessment now quarterly, you know, it could be that we would see those charges taken. And just to clarify, in the CA business, those charges are both for current receivable balances as well as against the contra asset account that sits on the books. So so not all of it is a write down of current receivables, but part of it is a write down of basically the value of that contract over time. That
Speaker 7
makes sense. Thank you, Barry, and thanks to everybody.
Speaker 2
Thanks, Lee.
Speaker 3
Yes.
Speaker 0
Thank you. This concludes our Q and A session. At this time, I'd like to turn the call back over to Mr. Oakley Thorn, President and CEO of Gogo, for closing remarks.
Speaker 2
Thanks all for attending our Q1 twenty twenty earnings call. I'd like to finish with a quick summary, if I could. First of all, InsightConnectivity is not going away because of the corona crisis. If anything, we think passenger adoption will accelerate as more people are connecting online during this pandemic, and that they'll want to stay connected once in flight when the pandemic is over. Second, we have a three track plan to ensure our long term solvency and drive value for our shareholders.
The first track is our operating plan. We constantly adjust scenarios and develop action plans along our 16 cost levers to hit our objectives, those objectives being to maintain the minimum liquidity we need to safely operate the company, to pay the interest due in our debt and to preserve the strategic franchise value of our two businesses. We've identified and are implementing $170,000,000 to $330,000,000 of cost savings to achieve those objectives and are well on our way to doing just that. Second track is our strategic track. We believe our Business Aviation division is a very attractive business that can stand on its own.
And we believe our Commercial Aviation business is the leading service provider to the commercial aviation industry. And we believe it could bring tremendous value in a vertically or horizontally horizontally integrated business combination. Finally, we have a financing track should the first two tracks fail. We're not currently pursuing financing. However, we're keeping our eyes open for appropriate opportunities if they arise.
We've applied to the federal government under the CARES Act for grants and loans earmarked for the airline industry and airline contractors. And if we receive government assistance, we would reinstate employees that have been furloughed and restore salaries that were reduced last week. I want to thank you for your attention and we look forward to speaking to you again in the future. And as usual, stay safe. Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.