Gogo - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 twenty twenty Gogo, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today Mr.

William Davis, VP of Investor Relations. Thank you, sir. Please go ahead.

Speaker 1

Thank you, Polly, and good morning, everyone. Welcome to Gogo's third 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 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 11/09/2020. Any forward looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we'll present both GAAP and non GAAP financial measures.

We've included a reconciliation and explanation of adjustments and other considerations of our non GAAP measures to the most comparable GAAP measures in our third 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

Thank you, Will, and good morning, everyone. Welcome to our third quarter conference call. Given the impact of COVID on the aviation industry, Gogo delivered a solid quarter and made significant progress on our strategic operating and financial initiatives capped off with the late August announcement that we signed an agreement to sell our commercial aviation division to Intelsat, the world's largest satellite company. Having achieved that milestone, we're now focused on three priorities. First, closing the aforementioned transaction and successfully migrating CA into Intelsat.

Two, relaunching the remaining Gogo to investors as a profitable communications provider focused on the business aviation industry. And three, strengthening our balance sheet and improving cash flow by reducing leverage, lowering our cost of capital and lowering our debt service. As you probably saw in our earnings release, results from our Commercial Aviation segment will now be accounted for as discontinued operations and assets held for sale. So my comments on the quarter will primarily focus on Business Aviation. Overall, we're encouraged by the recovery we've seen in the aviation industry, particularly in the BA market.

We also believe that this morning's announcement of what appears to be a highly effective vaccine from Pfizer bodes very well for a rebound of the commercial aviation industry next year. Today, I'll give you an overview of the quarter and report on our progress against the three priorities I just mentioned. Later, Barry will go over the Q3 numbers, discuss the $50,000,000 TAC on facility and provide an update on opportunities to refinance our debt. Let me comment on the TAC on for a moment. Though we still feel very good about our transaction with Indelsat, we currently live in a very uncertain world and feel that adding some buffer capital to our balance sheet is the prudent thing to do.

Before I get started, want to give a huge shout out to our CA, BA and corporate teams. This has been an extremely trying year, not only due to COVID and the actions we've had to take to respond to that challenge, but also because of all the hard work we've done and are still doing as part of the Intelsat transaction. So thank you. Let me start with our first priority, which is closing Both Indelsat and Gogo's teams are really excited about the synergies and innovation this combination will bring to the in flight connectivity market. We've built a robust program management structure with representatives from both companies to oversee 11 functional teams working on plans to quickly separate the GogoCA division from Gogo and integrated into Intelsat as soon as we clear the regulatory process and close the deal.

From a regulatory standpoint, we've made substantial progress. We've already cleared the U. S. Hart Scott Rodino process and all foreign jurisdiction antitrust requirements. And we've received all but one foreign telecommunications approval.

We're continuing to work closely with Intelsat to complete a review by CFIUS and to secure FCC approval for the transfer of two earth station licenses and an experimental license. The public comment period for the earth station licenses ended last Friday, but we won't know until later today whether anyone filed a comment or not. So we've made a lot of progress since announcing the transaction and though it's hard to predict the exact timing of what happens in the regulatory process, we feel upon schedule to close before the end of Q1 twenty twenty one as we guided at the time the deal was announced. Now let me move on to third quarter results for a moment. Continuing operations, which represent our former Business Aviation segment and our former unallocated corporate costs, reflect encouraging continued service demand recovery.

Generally speaking, the BA market had a shallower COVID related bottom and has had a faster recovery than the commercial aviation market. In Q3, our customers were back to flying 81% of the number of flights they flew in the prior year, up from 47% in Q2. And in October that grew to 83% of prior year flights. Interestingly, our large fleet operators ran much higher at 100% of prior year for the quarter, which we hope will push demand for more aircraft and more connectivity in that segment. As a result of these trends, we saw significant sequential improvement in service and equipment demand compared to Q2 twenty twenty.

And let me start with service revenue. Service revenue grew 21% over Q2, but was still down 4% from Q3 twenty nineteen. Total ATG aircraft online reached $5,577 up more than 3% from prior quarter and ARPU grew to $2,996 per month, up more than 17% from prior quarter. In the pandemic world, where less bad can be good, I would note that the $5,577 AOL number is down only 2% from our all time high in Q1 twenty twenty and that the $2,996 ARPU number is down only 6% from our all time high in Q4 of twenty nineteen. We had just over 500 gross ATG activations in the quarter, of which two thirty one or 46% were new accounts.

As we discussed on our Q2 call, what hurt our AOL and ARPU numbers in the COVID swoon were the large numbers of suspensions and downgrades planned downgrades we experienced back in April and May. Of the approximately 1,100 suspensions we experienced in that timeframe, seventy five percent have now come back online and 92% of those returned to their old plan or a higher priced plan. Of the nine twenty eight downgrades we experienced in that period, 71% have upgraded and 87% of those who upgraded returned to the same plan or purchased a higher priced plan compared to the plan they had before they downgraded. We think all of these service trends the fact that many industry pundits think the pandemic will be a catalyst for BA bode well for our BA service revenue in the future. Now, let me turn to equipment revenue where we're seeing signs of recovery with 25% growth in Q3 over Q2, though that's still down 49% from Q3 twenty nineteen.

That revenue growth was entirely driven by shipments of ATG Advanced units, which have considerably higher monthly service ARPU than satellite units. Shipments hit 167 units for the quarter, up 67% from prior quarter, but still down 43% from prior year. Satellite units have not had such a positive trend. 28 satellite units were shipped in Q3, down 58% from prior quarter and down 80% from same quarter prior year. On the earnings side, our continued our continuing operations generated $30,200,000 of adjusted EBITDA in the quarter, even when including the full cost of our corporate overhead.

That's a 9% decrease compared to this period last year, but represents a 45% adjusted EBITDA margin. The pace of recovery in BA excites us and gives us even greater confidence in our ability to drive growth as a more focused, stronger Gogo once the transaction with Intelsat is complete. I'll quickly touch on discontinued operations, our former CA NA and CA ROW segments, where we're also starting to see some encouraging signs of recovery. We saw a 34% sequential increase in combined CA revenue in Q3 over Q2, though Q3 was still down 61% versus prior year. A number of unusual events, which Barry will describe in more detail, elevated costs and payments for discontinued operations in Q3, including catch up on delayed satellite payments, accelerated depreciation for Delta deferred lease payments, bonus related stock based compensation expense, inventory reserves and expenses from the Intelsat transaction.

We believe that as the world recovers from the pandemic, demand for CA IFC services will explode as airlines compete for passengers by providing free, high quality WiFi and we believe that our CA business vertically integrated with Intelsat, the world's largest satellite operator will be extremely well positioned to compete in that exciting market. Now let me turn to the relaunch of Gogo as a communications provider focused on the business aviation industry, that's priority two. Our BA business operates in an industry with relatively little customer concentration, where 70 of The U. S. Market still does not have broadband connectivity.

It offers the industry's leading ISC product at an attractive price relative to competitive solutions and it has unique advantages due to its proprietary spectrum, its strong ATG network and the exceptionally talented and knowledgeable employees who work there. Our recurring revenue model and the owner economics of our ATG network generate strong cash flow, which for the last several years has been used to service the negative cash flow and debt associated with our CA business. Finally, I would note that BA has demonstrated a strong history of successful product introductions such as our advanced platform and our GoGo Vision Entertainment products. We're in the midst of revitalizing our five year strategic plan factoring in new data, notably that we'll now have more capital to invest in product initiatives like Gogo five gs that will enable us to defend and grow our strong franchise. As part of our planning, we're also looking for ways to optimize the corporate infrastructure that will need to support our BA business.

Initially, we'll need to over invest in corporate infrastructure in order to support transition services for Intelsat and to ensure the remaining Gogo can function as a standalone company. It will also take time to appropriately size and renegotiate some vendor contracts and our support infrastructure for a smaller sized business. So we do not see corporate expenses coming down much in 2021 and we'll discuss changes in the future when we complete our transition plans, which leads me to our third priority, rebuilding our balance sheet. Barry will provide more detail on the process we're going through to optimize this opportunity. But I'll state the obvious, which is that reorganizing our capital structure is very important to driving shareholder value for Gogo.

Towards that end, we're focused on refinancing our debt to significantly reduce our leverage, reduce our debt service and provide flexibility for further delevering in the future. As part of that plan, we'll also want to make sure we optimize the use of the net operating losses and other tax assets that we've accrued over the past several years. As I mentioned at the start today, we announced a $50,000,000 tack on to our senior secured notes to provide buffer capital as we work through our refinancing plans in these uncertain times. Before I turn the call over to Barry, I want to again thank our Gogo team for their continued hard work, dedication and creativity. You've really shown your medal this year.

And with that, let me turn it over to Barry to do the numbers.

Speaker 3

Thanks, Oak. For clarity, as we walk through this quarter's results, I'd like to start my comments by describing the impact on our financial statements from the planned sale of our Commercial Aviation division. We're very pleased to report that the transaction with Intelsat is on track, as Oak described. As a result, Gogo's financial statements will look very different this quarter. The commercial aviation business meets the accounting criteria to be classified as assets held for sale, and as such, the impacted balance sheet accounts have been presented this way.

In parallel, the CA division's results have been presented as discontinued operations on the income statement and cash flow statement. In the 10 Q, we discussed the CA business in a footnote for discontinued operations. As a result, our continuing operations include our Business Aviation division and the expenses that were formerly categorized as unallocated corporate costs. These figures for continuing operations will be comparable to the former BA segment reporting through the cost of service and equipment lines. The expenses previously categorized as unallocated corporate costs will be included in G and A.

Before getting into a summary of our operational results, I'd like to highlight several points at the corporate level. First is our cash position and cash flow. We exited the third quarter with $117,000,000 of cash, which was down from $156,000,000 at the end of the second quarter and represents a $39,000,000 reduction in our cash position. There are some important timing aspects reflected in the negative cash flow before interest from continuing and discontinued operations this quarter, in contrast to the breakeven level reported for the second quarter of this year. During the second quarter, we were in the middle of negotiations with many of our Satcom suppliers to provide us with economic relief as the COVID crisis emerged.

Because of the delicate stage of those discussions, we held back payments during that period. As we mentioned on our second quarter call, our satellite providers took a very partnership like approach with us, and we reached agreements with all of them, saving at least 50% on most of our satellite contracts. During the third quarter, we paid these outstanding invoices to bring them current. This resulted in us paying $47,000,000 to Satcom vendors during the third quarter. This was an increase of $37,000,000 from the second quarter and explains virtually all of the difference in the cash flow between these two quarters.

The cash flow before interest expense from continuing operations during the third quarter was strongly positive and approximately equal to the level achieved during the second quarter. As we look to the fourth quarter, we expect to achieve modestly positive cash flow before interest expense for Gogo as a whole. We expect to exit 2020 with approximately $70,000,000 in cash before considering the proceeds from our $50,000,000 tack on financing, but reflecting the impact of our $53,000,000 semiannual interest payment in November. As you know, we have been very judicious about managing our liquidity through COVID. With the continuing uncertainty of the pandemic and its impact, especially on our Commercial Aviation business, we deemed it prudent to add some buffer capital to our balance sheet this quarter.

In partnership with our creditors, we increased our senior secured note facility, which we were able to do on favorable terms due to the company's improved credit profile. We announced this morning that we have executed a $50,000,000 financing as a tack on to our existing senior secured notes, which will be financed by three of our bondholders. We expect the funding to occur this week. We have also committed to issue additional equity securities with net proceeds of at least $20,000,000 by 05/05/2021, in the unlikely event that the Intelsat transaction has not closed by that date. We are continuing to manage expenses very tightly during this period.

For reference, in the extremely unlikely event that the Intelsat transaction were to not close during 2021, we would manage the 2021 cash burn to be less than $40,000,000 based on the 16 cost management levers we have described on previous calls. Excluding the impact of the tack on and related equity proceeds, this would mean we'd exit 2021 with $30,000,000 in available cash. And we have other levers we could pull to maintain adequate liquidity in the event of this highly unlikely scenario. A final point I'd like to touch on at the corporate level is stock compensation expense. As noted on our last earnings call, we have planned for our annual operating bonuses to be paid in stock unless determined otherwise by our compensation committee.

Based on our expected financial results, employees will earn a bonus for our 2020 performance and $13,200,000 in stock compensation expense was recorded during the quarter. Approximately $8,500,000 of this expense was for CA and is included in discontinued operations and $4,700,000 is reflected in continuing operations. I will now turn to a discussion of our third quarter operating results beginning with our continuing operations. Again, these results include the former BA segment and unallocated corporate costs. As Oak described in some detail, our business aviation business was not hit as hard by COVID as CA, and it has recovered more quickly.

The rebound in BA is reflected in its financial performance. Total revenue from continuing operations was $66,500,000 While this was down 18% from the year ago quarter due to COVID, total revenue grew 22% sequentially, reflecting the rebound in Business Aviation from the low point in the second quarter of this year. This revenue improvement occurred in both On a year over year basis, service revenue of $53,300,000 declined just 4% and was up 21% sequentially, reflecting strong customer reactivation. As Oak mentioned, 92% of previously suspended accounts renewed at equivalent or upgraded subscription plans as compared to pre COVID plans. Equipment revenue of $13,200,000 was down 49% over the same quarter a year ago, but grew 25% over the second quarter of this year.

We're seeing a strong pickup in equipment sales from our flagship Avance ATG product platform, as I've mentioned. Notably, September equipment sales were higher than January, and September service revenue was over 90% of the January pre COVID levels. The primary driver of the sequential increase in service revenue was ATG ARPU. This accounts for approximately 80% of the revenue increase as the vast majority of customers reinstated their service plans at equivalent or upgraded levels. After dropping over 18% sequentially in the second quarter due to COVID, ATG ARPU rebounded during the third quarter to $2,996 which is up 17% sequentially.

An important indicator of the BA recovery is that ATG ARPU for the third quarter was 97% of the year ago level of $3,087 The balance of the $8,800,000 sequential increase in revenue was due to higher units online, which reached 5,577 for the quarter, up 3% sequentially. The solid recovery in BA's top line has carried through to the bottom line for our continuing operations,

Speaker 2

as we

Speaker 3

have managed expenses tightly across the company. Adjusted EBITDA for continuing operations was $30,000,000 for the third quarter. This is up 36% sequentially from $22,000,000 in the second quarter of twenty twenty and is down just $3,000,000 from the third quarter of twenty nineteen. As a reference point, the annualized 2020 adjusted EBITDA for continuing operations is approximately equal to the full year adjusted EBITDA for 2019, which was $122,000,000 BA has also maintained attractive gross profit margins during the COVID pandemic, with service gross margin of 78% for the third quarter of twenty twenty. This compares to 81% achieved for the past two full years.

Equipment margins have decreased somewhat from the 41% achieved for each of the past two full years to 35% this quarter. This 6% decline reflects the fixed costs associated with our manufacturing operations with the lower equipment shipments during the pandemic. The combined expense categories of engineering design and development, sales and marketing and G and A for continuing operations decreased to $20,800,000 down 18% from the third quarter of twenty nineteen. During the third quarter of this year, we spent roughly $2,400,000 less on five gs development versus the year ago quarter. Somewhat due to the timing of this ED and D spending, adjusted EBITDA margins for the continuing operations came in at 45% for the quarter, the highest level achieved for at least the past seven quarters.

Finally, cash flow from operating activities for continuing operations was $20,300,000 for the first three quarters of twenty twenty, which included $53,000,000 of interest payments. By this measure, continuing operations cash flow, excluding interest, has been relatively consistent by quarter throughout the year. You will see from the significantly revised 10 Q filing that interest expense is assigned to continuing operations. So cash flow from continuing operations will reflect our semiannual interest payments in May and November. While our Commercial Aviation business is treated as discontinued operations in statements, let me offer a couple of comments on our CA business.

CA continues to be quite hard hit by COVID, although service revenue exceeded our internal forecast during the third quarter. CA service revenue was $40,500,000 reflecting a 61% decline from the third quarter a year ago. However, service revenue grew 34% sequentially from the second quarter of this year when the impact of COVID first emerged. The CAE business generated a net loss of $71,200,000 This includes $27,000,000 of accelerated depreciation, offset by $18,000,000 of accelerated amortization of deferred lease proceeds, both related to the Delta contract amendment signed in the second quarter of twenty twenty. The net loss also includes approximately $20,000,000 of stock based compensation expense, inventory reserves and transaction expenses.

As we look ahead, I thought it might be helpful to offer some perspective on both the transformational Intelsat transaction as well as our retained BA business. In our view, the Intelsat transaction represents a rare win win win opportunity in the world of deal making. We believe it should be good for Gogo, good for Intelsat and good for the CA employees. We have long said we believe CA would benefit from being a part of a larger entity, and the industrial logic for the Intelsat acquisition is very compelling. We're glad to see Intelsat's interest in establishing GogoCA as a strategic platform built on the strong market position and talent of the Gogo employees.

We are enthusiastic about the business and cash flow generation capability of Business Aviation as a stand alone business. As Oak described in some detail, there are multiple compelling factors which contribute to BA's cash flow generation capability. Let me amplify on two of these, which will contribute directly to BA's cash flow generation in the years ahead. These include the significant tax benefits retained at VA post the Intelsat transaction and the opportunity to significantly reduce interest rate expense through a comprehensive refinancing. As of 09/30/2020, Gogo had over 700,000,000 in federal and over $450,000,000 in state net operating loss carryforwards.

In addition, we had approximately $170,000,000 in federal interest expense carryforwards. At today's corporate tax rate, these benefits will reduce VA's future federal tax liability by over 175,000,000 While we expect the closing of the CA sale to utilize a portion of these tax benefits, these tax attributes will benefit the company for years into the future. Now I'll turn to the refinancing opportunity we see in front of As you know from the structure of the CA transaction, all of the company's debt will remain with Gogo. In parallel with pursuing the close of the Intelsat transaction, we have been evaluating a range of refinancing alternatives as one of the three key priorities Oak outlined. We have been performing this analysis with several considerations in mind: Gogo's optimal capital structure secondly, the appropriate timing for the refinancing and thirdly, achieving as much strategic and operational flexibility as possible.

Given the enhanced creditworthiness of VA on a stand alone basis, we believe we will be able to significantly reduce our interest expense through a comprehensive refinancing of our balance sheet. While we cannot predict the future state of the capital markets, they are currently very strong. If these conditions persist, we would expect to refinance our senior secured notes by no later than their first call date in May of twenty twenty one. We think it is likely that Gogo could achieve a ratings upgrade, which would enable us to tap into more attractive capital sources at significantly lower rates than we are paying today. If we were to do this refinancing in today's markets, we believe we could cut our interest expense by nearly half, saving as much as $50,000,000 annually after the balance sheet is fully refinanced.

Now I'd like to offer a couple of additional comments regarding future expectations. We will not be providing guidance on this call, because we have not closed the Intelsat transaction and there is still meaningful uncertainty around the ongoing impact of COVID on our business. Also, as Oak described, we are in the middle of developing strategic and long term financial plans for BA as a stand alone business. However, I will offer a couple of comments on our continuing operations as we look forward to 2021. First is regarding our expectations for what were previously classified as unallocated corporate costs and are now included as part of G and A for continuing operations.

We have brought these costs down from $46,000,000 in 2018 to approximately $35,000,000 in 2020 as a result of the integrated business planning process we launched in 2018. We see opportunities to further reduce these expenses over time as BA is a smaller organization. However, we expect these costs to remain at approximately the 2020 level during 2021 as we want to ensure stability in these functions post the Intelsat transaction. We would expect these expenses to reduce beginning in 2022. For the fourth quarter of this year, we expect to see some sequential increase in expenses versus the third quarter due to increased ED and D project spending and the foregone CEO bonus, which was reversed in the third quarter.

As a result, we expect lower adjusted EBITDA from continuing operations for the fourth quarter of twenty twenty from the third quarter of twenty twenty. As Oak mentioned, we are in the middle of conducting a deep dive review of our BA business, which will result in a refreshed strategic and long term financial plan. As a part of this process, we will assess key capital allocation alternatives, including the timing of our five gs rollout, long term leverage targets, adjacent product and market opportunities and the like. During the years of investing heavily in our CA business and more recently during the COVID pandemic, we've had to be very judicious about the levels of investment in BA. As a result, we have probably underinvested relative to what we might have done or be a stand alone business.

We will certainly bring our culture of planning rigor and financial discipline to this process. But we also believe there are opportunities within this attractive market, which we will want to aggressively pursue as we work to drive value. As I conclude my prepared remarks, I want to again join Oak in thanking our fellow employees for their tremendous commitment, creativity and work ethic during these challenging times. Not only have we had to navigate through the turbulence of the COVID pandemic, you have enabled us to successfully reach an agreement on the CA sale and are now working tirelessly through the many integration activities.

Speaker 2

Through

Speaker 3

it all, you have demonstrated a spirit of partnership and even adventure for what lies ahead. Thank you so much. Operator, we're now ready for our first question.

Speaker 0

Thank And your first question comes from the line of Phil Cusick with JPMorgan.

Speaker 3

Hi, this is Sebastiano. Hi,

Speaker 4

it's Phil. I got it. Sorry. Thanks for your time guys. How do you think about balancing BA free cash flow versus investing to grow?

And what's the optimal leverage? And then I

Speaker 3

have a couple of follow ups.

Speaker 2

Yes, Phil, this is Oakley. We're actually that's all part

Speaker 3

of our

Speaker 2

financial planning and I think we'll give more guidance on that in our Q4 call. We look at this, there's a number of sources of number of things will drive cash flow including in the NOLs, obviously the business itself. We want to reinvest in order to develop five gs and other new products to continue to strengthen the franchise and we want to delever. So as you say, it's a balancing act between all those things. And as we finish up our planning, sort of have that optimal balance figured out.

That's part of what we're doing.

Speaker 4

Okay. And what's the ability to retain flexibility on those tax assets on any kind of sale of the business?

Speaker 2

I think it's fairly limited, Phil. So I think we would one, I think the best thing for our shareholders may be to make sure we use those NOLs and use that as a source of delevering. Barry, do you have anything any color you want to add to that that would be any different? No. As

Speaker 3

I mentioned, Phil, it typically is difficult to retain that value. There may be some situations under which they could be retained, that also is part of the comprehensive look that we're taking with the business overall. Think the first priority is to really drive the value of the business, see the cash flow generative capability that it has. And think over the next several years, we'll certainly be able to take advantage of those NOLs.

Speaker 4

Okay. And last thing, Oak, how do you think about BA being better in a larger entity as well as CA? Does this business have enough scale to remain independent over time?

Speaker 2

I think it does have enough scale to remain independent because it's very cash flow generative and it can invest in developing highly specialized products for its niche market. So I think that it can remain independent. Obviously, there are a lot of strategic players who would love to own it. That's always a good thing. We are focused on driving shareholder value and in the end we'll do whatever we think optimizes that.

So we don't have any right now we're planning to stay a public company and manage ourselves as we've sort of outlined. So there's no change in that plan, but it could change over time.

Speaker 4

Okay. Thanks guys.

Speaker 0

And your next question comes from the line of Rick Prentiss with Raymond James.

Speaker 5

Thanks. Good morning guys. Glad to hear you're making it through these difficult times well. A couple of questions. A follow-up on Phil's question maybe a little bit there.

How should we think about the CA to BA reimbursements? Have those been fully reflected in this continuing, discontinuing operations? And what's the potential in the future as you roll out the five gs ATG network to get more reimbursements from the CA business once it's over at Intel's side?

Speaker 2

Rick, I just want to make sure, are you talking about the ATG revenue share? Yes. Starts That out relatively modestly. It goes up a level when we get five gs launched as that says there is an incentive to get five gs out in the market. And I don't think we're going to give any more guidance than we gave at the time of the deal, which is that there's two components to this.

One is the rev share itself and then the other is the minimum revenue guarantee that they would have to pay us if they want to maintain exclusivity. And Barry, I think that over the ten years, I think we guided that that was roughly $170,000,000 for the revenue guarantees. Is that right?

Speaker 3

Yes, that's right. Yes, 170,000,000 yes.

Speaker 2

And Rick, on you go ahead, sir.

Speaker 3

So I was just going to address the first part of your question also, which is related to the CA to VA reimbursements. And to your question, we have not finalized those yet. As Oak mentioned, we're very active in the transition planning process with these 11 teams. There is the capability to have transition service agreements. So we're working through all the details of those by function.

And as those get finalized over the coming weeks, we'll see what those reverses look like. But generally, the contract provides for those to be reimbursed on a cost plus basis. Okay.

Speaker 5

Makes sense. And then I think you mentioned also Barry that there was a little bit of year over year difference on five gs costs. Should we think about what you have left to spend on the five gs both OpEx and CapEx? And what timeframes you might start spending it? Are you going to wait for the deal to close?

Or how should we think about the spreading of those five gs ATG costs?

Speaker 3

Yes. We're in the middle of the OpEx spend as we're doing the development with our three primary partners. So we're well along in that, but that will continue certainly through next year. We have not started spending in real meaningful ways on the CapEx side other than capitalizing the software portion of that development. So as you know, the real OpEx spend is starts when we start installing the towers and equipment on the towers, not the towers, but the equipment on the towers.

So we would expect to start seeing that happen next year and then it'll get rolled out in an appropriate sequencing and timeframe. Again, as we've said, the exact timing of that will be a part of this strategic planning process that we're going through.

Speaker 5

Okay. And maybe from a more high level strategic standpoint, how do you view what's happening in the competitive dynamics of the BA business? Any update as far as more direct competitor that keeps kind of being on the edge?

Speaker 2

They have a new CEO. I think you're asking about SmartSky. They still have, I think, a lot of technology challenges in terms of being able to launch a network. And then they're going to need to fund a lot of operating losses while they try and ramp revenue. Our view is our product is going to be better is better than theirs and will be better than theirs.

Our five gs product will not only use the 60 megahertz of unlicensed spectrum that they'll use, but we will have four megahertz of licensed clean spectrum, which will make the product a lot better wherever there's interference with the unlicensed spectrum. So that and the fact that we've been doing this a long time. We have a much longer distance between the tower and the aircraft just because of the way we've been able to engineer the products. They still haven't figured that out. And so their CapEx is going to have to be a lot higher than ours.

They're going to have higher tower density than we have. On a competitive front, I guess, I'm not really as worried about them as I am the guys that compete with us at the top of the market. We've got we face very strong competitors today in ViaSat and Inmarsat and they obviously are eyeing the BA market as growth opportunity for them. So those are the ones we really focus on. And I guess the last point I'll make about the competitive situation is that this is just a really unpenetrated market.

I mean 70% of The U. S. Market doesn't have any broadband yet. So and a lot of that is frankly in smaller fuselage airplanes that we're better prepared to serve them in MARSET or BIOSET are. So we think it's a growth market.

We're not that focused on share as we are on absolute growth. And frankly, right now, I think we're uniquely positioned by virtue of having a product that is performs better than anybody else's product with the low latency right now. Also, it's particularly suited to the BA market because of the size of the fuselage and the equipment we have is much easier to put on, cheaper, more conducive to the size of the fuselage in the VA market and our proprietary spectrum. So we view ourselves as very competitive, Frankly, I'm not that worried about the Smart Sky entrance and they're focused on competing hard with the big guys in MARSAT and ViaSat at the top of the market.

Speaker 5

Great. Thanks guys. Hope you continue to be well.

Speaker 2

Thank you, Sandy. Appreciate it.

Speaker 0

And your next question comes from the line of Scott Searle with ROTH Capital.

Speaker 6

Good morning. Thanks for taking my questions. Hey, congrats on the HSR ruling and nice job on the BA results.

Speaker 2

Yes. My lawyers would tell me to make very clear it wasn't a ruling. It's just that we got the thirty two period thirty day period without a follow-up request.

Speaker 6

Okay, fair enough. Hey, I know you've mentioned this a couple of times on the call, but I just want to be clear. In terms of the corporate overhead allocation, that is fully reflected in the numbers as reported today. The difference is like a little less spending in terms of five gs, it looks like in the current quarter. So as we go into 2021, that is kind of normalized base level depending on what happens Yes.

Depending on five

Speaker 3

So it's correct in understanding expenses and the expectations we set there. As we look to next year, what we're really trying to be clear about is that the corporate spend that was considered classified as unallocated corporate spend was approximately $35,000,000 for all of 2020. It has come down, as you know, substantially over the last several years. But we expect it to remain in about that same ZIP code as we want to be thoughtful about ensuring that we have this transition well done, we can provide the transition services and so on during the course of 2021. We will be actively looking at that set of expenses and certainly the smaller size of BA would conclude that we ought to be able to spend less on external costs.

The audit is not as complex and those kinds of things. So we would expect those costs to come down beginning in 2022. But for 2021, we would expect them to kind of be in that general same area that they are for 2020.

Speaker 6

Great. Thank you. And just following up on some of the BA metrics you provided. Aircraft utilization is starting to come back. I think you said larger fleets are at 100%.

I was wondering if you had any view in terms of your regional mix of your business. Northeast has certainly been a little bit more constrained than other such as Florida, Colorado, Southern California. Kind of help us understand that a little bit. And the units sold in the quarter, I think were 167 that you indicated, but I think you also indicated a number over 200 in terms of new customers and new aircraft. I wonder if you could reconcile that for us.

Is that 200 plus number, how should we be thinking about things on a more normalized basis going forward? And then I had one last final question.

Speaker 2

Yes, the two up I'll answer the last part and then let Barry handle the first part. The 200 plus number is activations, not shipments, right? So we ship units to dealers who put them in inventory to OEMs who also put them in inventory. Those are installed on planes over time and then later activated. So the 500 number of which 200 and some odd about 46% were new customers with activations, not units shipped.

Okay. Does that make sense?

Speaker 6

It does. So does that mean then the channel is pretty clear at this point in time, there's not a lot of inventory sitting out there at dealers?

Speaker 2

No, there's not much inventory sitting at dealers and it's sort of it's getting a certain noting, it'll dry up a bit because the units aren't hitting the same the units shift aren't as high as the activations and that's a good indicator of future demand. So I think you're right about that.

Speaker 6

And I'm sorry, the regional utilization?

Speaker 3

Yes. Go ahead, Ed.

Speaker 2

You take that one. Well, yes, I mean, frankly, we aren't I don't have data for you on the BA market in that regard. I will say this, people are flying further this year. So about it won't sound like much, but if you think the average flight is an hour and a quarter or something like that, it's up about eight minutes overall. So people are flying further, which would indicate that to me that they are hunkered down somewhere and when they fly in business that somewhere is further away from the business than it was pre COVID.

In terms of the commercial aviation market, the Northeast has over just the second COVID hit, the Northeast came down in terms of the number of flight departures and the South and West went up. And that continues to hold. That hasn't changed.

Speaker 6

Great. And lastly, I could, could you just give us an updated number in terms of the number of AVANCE or five gs ready aircraft that are out there at the current time? And in general, as it relates to five gs, you've got an opportunity to press an advantage. You're being certainly cautious in the near term now until we get the closure of the CA sale from a cash perspective. But assuming that closes at the end of first quarter, do you guys get more aggressive in pushing on that front to push your competitive advantage?

Thanks.

Speaker 2

I'll answer the last part. Yes is the answer obviously. We as soon as we have money in the bank, we're going to try and move as fast as we can on five gs. And we'll update people on our five gs plans at a later date. Terms of the I'm sorry, it's about fifteen I think we had a press release on that not too long ago.

There's maybe another 20 or 30 planes on top of that now.

Speaker 6

Great. Thank you.

Speaker 0

And your next question comes from the line of Louie DiPalma with William Blair.

Speaker 7

Both Barry and Will, good morning.

Speaker 2

Good morning, Louie. Hi, Louie.

Speaker 7

Good Intelsat and its deal rationale discussed the benefits of going direct and the CA asset would have likely fit with many other satcom owners and operators as well that the deal helps Intelsat main competitive with vertically integrated Inmarsat and ViaSat. Intelsat also indicated that the deal helps them protect high margin revenue if someone else were to have acquired you. So with that being said, under what scenarios could cause the deal not to close? The deal was consummated in the middle of the pandemic and after you already disclosed the need to renegotiate the Delta free contract. So like what could possibly trigger a deal termination?

And is there anything that you are overly concerned about?

Speaker 2

I think we're not going to deal in hypotheticals. The deal is constructed pretty tightly. You can read the PSA in the SEC filings. So I think that we don't see any major risks to the deal closing at this point.

Speaker 7

Sounds good. And for Barry, you mentioned like different puts and takes with the cash flows this quarter. Do you have any estimate on what the ballpark net debt will be when the transaction closes in the first quarter?

Speaker 3

As you know, Louis, the transaction is subject to the customary working capital adjustments, transaction costs to come out of that and so on. So wouldn't speculate on what that number is going to be at this point and what the net number is on the $400,000,000 But I think an important part of all this is that as we think about the refinancing and the transaction on the yield of the transaction is that we'll have a meaningful amount of cash that gives us a lot of flexibility when it comes to the refinancing and what we do with the balance sheet. We'll certainly have more to say about that as we get closer and see what the actual net cash position is as a result. I think you can obviously do the math and see that it's going have a very significant positive impact from our cash position.

Speaker 7

Great. That's it for me. Thanks guys.

Speaker 3

Thanks, Laurie. Thanks, Laurie.

Speaker 0

And your next question comes from the line of Greg Chibis with Northland Securities.

Speaker 8

Hey, Greg. Great. Thanks. Hey, good morning, Hope and Mary. Thanks for taking the questions.

Just a couple of quick ones first. Regarding the 1,100, I guess, suspensions on the BA side that came from COVID, you said seventy five percent back online. Just wondering how many of those you expect to fully recover? And then quickly, if you could just elaborate on kind of the pace of the recovery month by month. I know you said in the quarter, was 81% of flights kind of year over year and that kind of bumped up to 83% in October.

Any sense you can give us on how fast that maybe moved month over month within the quarter?

Speaker 2

That's a little hard to say. I mean, it came back very quickly in sort of the May, June, July timeframe. So I think it was probably relatively consistent in the quarter. Have to remember in April, typically we're flying 3,000 to 3,500 flights a day and we got down, I think our low point was something crazy like 90 flights one day. So, the so I would say that the bounce back was very quick and it probably went up gradually over the quarter, but it was back up to those levels pretty soon in the quarter.

In terms of projecting the rate of recovery going forward, I think that's very hard to do. If you can tell me what's going on with COVID in three months, I can give you an answer maybe, but without knowing a lot more certainty what's going to happen, I'm not going to make any guesses on that front. The suspensions, almost back to just the normal suspension level. We get in this, I'm don't hold me to the exact numbers, but we get 100 to 150 suspensions every month for people who are taking aircraft out of service and don't want to pay for the service while their planes are in the shop. And that's a typical reason they suspend.

And, we're under 300 now suspended from the timeframe that we talked about. Well, we're under 300 period. So we're not that much higher frankly than our normal rate, if you will. So maybe we have maybe doubled the number we normally have, but it's not very high, call it another 150, we'd be right down at the normal level. So they're coming back.

They're coming back. At this point, it's starting to slow a bit, but we're also signing new customers and we're getting a lot of new growth. So we think we're pretty bullish on being able to grow units continue to grow units from here.

Speaker 8

Yes, thanks for the clarity there. I guess one other follow-up, just kind of relating to the unallocated corporate costs. You mentioned going from $46 in 2019 to $35,000,000 this year. What was the reasoning, I guess, for those being flat in 2021 as well?

Speaker 2

Yes. The

Speaker 3

reason is go ahead.

Speaker 2

Was just going to say there's a couple of things going on. Number one, we are going to have to perform transition services for Intelsat. We don't have that. We're still working on those as Barry discussed earlier with the 11 functional teams, etcetera, etcetera. And the exact reimbursement scheme is still being worked on, etcetera.

So we don't want to get over our skis on that. And also, we have a lot of legacy work to do as a standalone company that by virtue of having owned CA, we're still going to have a fair amount of tax work and other types of work to do through certainly through 2021. And so our planning around this is something we're going through right now and we expect we'll start to see some saves in 2022. So we'll give more sense of direction on that in future calls when we have our transition plans complete.

Speaker 8

Okay, great. Thank you.

Speaker 0

And your final question will come from the line of Simon Flannery with Morgan Stanley.

Speaker 9

Great. Thank you. Good morning, everybody. Oak, you were talking a little bit about the satellite space. Maybe you could comment on the LEOs.

We've got a SpaceX public beta. And how do you see the LEOs playing in the business aviation world going forward?

Speaker 2

Yes. I think we think that's an opportunity for us. And one of the virtues of having coming out of playing in the satellite world is that we've learned a lot about it. And so I think LEOs will enable smaller form factors in the future and especially as ESA antennas come along. And so we find that all interesting in a good market opportunity for us.

Speaker 9

Okay, great. And on the delivery side, what are you hearing from the Textron's of the world and how are they getting past COVID on their side in terms of new shipments coming on and filling up your pipeline over the next few quarters?

Speaker 2

Yes. I want to start angling all the OEMs by talking about what's going on in their business. I'm not going to do that. But I think that everybody would agree there's still a good deal of uncertainty on exactly what order is going to look like for next year. And as clarity comes about in terms of what's going to happen with the pandemic, I think that the OEMs will start nailing down their production schedules.

But right now, I think everybody's in a wait and see mode.

Speaker 9

And what percent of your kind of activations come from OEMs versus retrofits or whatever?

Speaker 2

The retrofit market is much larger than the OEM market. Just look at the number of deliveries, there's you measure the number of deliveries in the OEM market in the hundreds and there are literally more than 10,000 many more than 10,000 aircraft out there without broadband in the aftermarket.

Speaker 9

Right. But in terms of the and the flow share, do you have if there's split of how many of your last quarter, how many of them went on new planes versus on existing planes?

Speaker 2

Almost everything last quarter would have gone on earnings.

Speaker 3

Great.

Speaker 2

There weren't many if you look at last quarter.

Speaker 9

Many thanks.

Speaker 1

Okay. Thanks, Simon. That's our last question, operator.

Speaker 0

Okay. And we'll now turn the call back over to Mr. Oakley Thorne for closing remarks.

Speaker 2

Thank you, Polly. Look, thank you for attending our Q3 earnings call. I think we're making significant progress on the priorities I outlined earlier that is closing the Intelsat transaction, relaunching the new GoGo as a profitable communications provider to the business aviation industry and strengthening our balance sheet and improving cash flow by reducing our leverage, lowering our cost of capital and lowering our debt service. We look forward to sharing more of our progress with you in the future as our strategic transition and refinancing plans come together to drive future GoGo shareholder value. And thanks again.

Speaker 0

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.