Categories Earnings Call Transcripts, Technology

Gogo Inc. (GOGO) Q3 2020 Earnings Call Transcript

GOGO Earnings Call - Final Transcript

Gogo Inc. (NASDAQ: GOGO) Q3 2020 earnings call dated Nov. 09, 2020

Corporate Participants:

William Davis — Vice President, Investor Relations

Oakleigh Thorne — President and Chief Executive Officer

Barry Rowan — Executive Vice President and Chief Financial Officer

Analysts:

Philip Cusick — J.P. Morgan — Analyst

Ric Prentiss — Raymond James — Analyst

Scott Searle — ROTH Capital Partners — Analyst

Louie DiPalma — William Blair — Analyst

Greg Gibas — Northland Securities — Analyst

Simon Flannery — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Gogo Inc. Earnings Conference Call. [Operator Instructions]. 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.

William Davis — Vice President, Investor Relations

Thank you, Polly, and good morning everyone. Welcome to Gogo’s third quarter 2020 earnings conference call. Joining me today to talk about our results are Oakleigh 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-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is November 9, 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 will present both GAAP and non-GAAP financial measures.

We have 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 in 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 will host a Q&A session with the financial community only.

It is now my great pleasure to turn the call over to Oakleigh.

Oakleigh Thorne — President and Chief Executive Officer

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 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 COVID 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 million tack-on facility and provide an update on opportunities to refinance our debt. Let me comment on the tack-on for a moment. Though, we still feel very good about our transaction with Intelsat, 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, I want to get 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 the Commercial Aviation transaction. Both Intelsat and Gogo’s teams are really excited about the synergies and innovation this combination will bring to the inflight 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 Gogo CA division from Gogo, and integrate it 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 telecommunications approval. We’re continuing to work closely with Intelsat to complete a review by CFIUS and to secure SEC approval for the transfer of two workstation licenses and an experimental license. The public comment period for the air 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 on schedule to close before the end of Q1 2021 as we guided at the time the deal is 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, large fleet operators 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 a significant sequential improvement in service and equipment demand compared to Q2 2020, and let me start with service revenue. Service revenue grew 21% over Q2, though still down 4% from Q3 2019. Total ATG aircraft online reached 5,577 up more than 3% from prior quarter and ARPU grew $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 2020, and that the $2,996 ARPU number is down only 6% from our all-time high in Q4 of 2019. We had just over 500 gross ATG activations in the quarter, of which 231 or 46% were new accounts.

As we discussed in 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, 75% have now come back online and 92% of those returned to their old plan or a higher price plan. Of the 928 downgrades we experienced in that period, 71% of upgraded and 87% of those who upgraded, returned to the same plan or purchased a higher price plan, compared to the plan they had before they downgraded. We think all of these service trends and 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 2019. That revenue growth was entirely driven by shipments of ATG AVANCE 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 continuing operations generated $30.2 million 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, decelerated 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 Wi-Fi 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 too. Our BA business operates in an industry with relatively little customer concentration. About 70% of the U.S. market still does not have broadband connectivity. It offers the industry’s leading IFC 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, generates strong cash flow. But for the last several years, it 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 on our AVANCE 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 will now have more capital to invest in product initiatives like Gogo 5G, 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 we will need to support our BA business. Initially, we’ll need to overinvest in corporate infrastructure, in order to support transition services for Intelsat, and to ensure that 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 businesses. So we do not see corporate expense 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, decrease our debt service, and provide flexibility for further de-levering in the future. As part of that plan, we also want to make sure we optimize the use of the net operating losses and other tax assets that we have accrued over the past several years. As I mentioned at the start today, we announced a $50 million 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 mettle this year. And with that let me turn it over to Barry, to do the numbers.

Barry Rowan — Executive Vice President and Chief Financial Officer

Thanks Oak. For clarity, as we walk through this quarter’s results, I’d like to start my comments by describing the impact on the 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 impact of 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 produced 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&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 million of cash, which was down from $156 million at the end of the second quarter, and represents a $39 million reduction in our cash position. There are some important time 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 are 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 million to satcom vendors during the third quarter. This was an increase of $37 million from the second quarter, and explains virtually all of the difference of 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 million in cash, before considering the proceeds from our $50 million tack-on financing, but reflecting the impact of our $53 million semi-annual 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 million 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 million by May 5, 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 million, 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 that we’d exit 2021 with $30 million 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 $13.2 million in stock compensation expense was recorded during the quarter. Approximately $8.5 million of this expense was for CA, and is included in discontinued operations and $4.7 million is reflected in continuing operations.

I’ll 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 $66.5 million. 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 service and equipment revenue. On a year-over-year basis, service revenue of $53.3 million 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 $13.2 million 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 $8.8 million 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 topline has carried through to the bottom line for our continuing operations, as we have managed expenses tightly across the company. Adjusted EBITDA for continuing operations was $30 million for the third quarter. This is up 36% sequentially from $22 million in the second quarter of 2020, and is down just $3 million from the third quarter of 2019. 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 million.

BA has also maintained attractive gross profit margins during the COVID pandemic, with service gross margin of 78% for the third quarter of 2020. This compares to 81% achieved for the past two full years. Equipment margins have decreased somewhat in the 41% achieved for each of the past two full years, to 35% this quarter. This 6% decline reflects 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&A for continuing operations, decreased to $20.8 million down 18% from the third quarter of 2019. During the third quarter of this year, we spent roughly $2.4 million less on 5G development versus the year ago quarter. Somewhat due to the timing of this ED&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 $20.3 million for the first three quarters of 2020, which included $53 million 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 a significantly revised 10-Q filing, that interest expense is assigned to continuing operations. So, cash flow from continuing operations will reflect our semi-annual interest payments in May and November.

While our commercial aviation business is treated as discontinued operations in our financial 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 $40.5 million, 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 CA business generated a net loss of $71.2 million. This includes $27 million of accelerated depreciation, offset by $18 million of accelerated amortization of deferred lease proceeds, both related to the Delta contract amendment, signed in the second quarter of 2020. The net loss also includes approximately $20 million 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 are glad to see Intelsat’s interest in establishing Gogo CA as a strategic platform, built on 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 standalone 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 BA post the Intelsat transaction, and the opportunity to significantly reduce interest rate expense, through a comprehensive refinancing.

As of September 30, 2020, Gogo had over $700 million in federal and over $450 million in state, net operating loss carry-forwards. In addition, we had approximately $170 million in federal interest expense carryforwards. At today’s corporate tax rate, these benefits reduce BA’s future federal tax liability by over $175 million. 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 will turn to the refinancing opportunity we see in front of us. 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 on DA on a standalone 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 2021. 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 million 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 standalone 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&A for continuing operations. We have brought these costs down from $46 million in 2018, to approximately $35 million in 2020, as a result of the integrated business planning process we launched in 2018. We see opportunities to further reduce the 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&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 2020 from the third quarter of 2020.

As Oak mentioned, we are in the middle of conducting a deep dive review of our BA business, which will result in 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 5G 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 then, with BA a standalone 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. Thanks to the strength and dedication of the teams. Through 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.

Questions and Answers:

Operator

[Operator Instructions]. And your first question comes from the line of Phil Cusick with J.P. Morgan.

Philip Cusick — J.P. Morgan — Analyst

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 have a couple of follow-ups?

Oakleigh Thorne — President and Chief Executive Officer

Yeah Phil, this is Oakleigh. They’re actually all part of our financial planning and I think I will give more guidance on that in our Q4 call. We look at this with — there a number of sources of — a number of things will drive cash flow, including in the NOLs, obviously, the business itself. We want to really invest, in order to develop 5G 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, we will sort of have that optimal balance figured out.

Barry Rowan — Executive Vice President and Chief Financial Officer

It’s part of what we’re doing. Okay. And what’s the ability to retain flexibility on those tax assets on any kind of sale of the business?

Oakleigh Thorne — President and Chief Executive Officer

I think it’s fairly limited, Phil. So I think we would — one, I think the best thing for our shareholders maybe to make sure we use those NOLs, and use that as a source of delivering. Barry, do you have anything — any color you want to add to that, that would be any different?

Barry Rowan — Executive Vice President and Chief Financial Officer

No. As I’ve mentioned, Phil, it typically is difficult to retain that value. There may be some situations on which they can be retained, but that also is part of the comprehensive look that we’re taking to the business overall. At least first priority is to really drive the value of the business, see the cash flow generative capability that it has, and then over the next several years, we’ll certainly be able to take advantage of those NOLs.

Philip Cusick — J.P. Morgan — Analyst

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 overtime?

Oakleigh Thorne — President and Chief Executive Officer

Yeah, 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 rate niche market. So I think it can remain independent. Obviously there are a lot of strategic players who would love to own it, so that’s always a good thing. We are focused on driving shareholder value, and in the end, we will do whatever we think optimizes that. So when we don’t have any — right now, we’re planning to stay a public company and manage ourselves, as we sort of outlined and so there is no change in that plan. But it could change over time.

Philip Cusick — J.P. Morgan — Analyst

Okay, thanks guys.

Operator

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

Ric Prentiss — Raymond James — Analyst

Thanks. Good morning guys. Glad to hear you’re moving through these difficult times well. 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 5G ATG network, to get more reimbursements from the CA business, once it’s over at Intelsat?

Oakleigh Thorne — President and Chief Executive Officer

Ric, I just want to make sure, are you talking about the ATG revenue share?

Ric Prentiss — Raymond James — Analyst

Yeah.

Oakleigh Thorne — President and Chief Executive Officer

Yeah. You know that — excuse me, starts out relatively modestly. It goes up a level when we get 5G launched, is that if there is an incentive to get 5G out in the market. And I don’t think we’re going to get any more guidance than we gave at the time of the deal, which is that, you know, there is 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 10 years, I think we guided that that was roughly $170 million for the revenue guarantee, is that right?

Barry Rowan — Executive Vice President and Chief Financial Officer

Yes, that’s right. Yeah, $177 million. Yeah.

Oakleigh Thorne — President and Chief Executive Officer

Yeah. So…

Barry Rowan — Executive Vice President and Chief Financial Officer

And Ric on the…

Oakleigh Thorne — President and Chief Executive Officer

Go ahead Barry.

Barry Rowan — Executive Vice President and Chief Financial Officer

So I was just — Ric, I am going to address the first part of your question also, which is related to the CA to BA reimbursements. And to your question, we have not finalized, as well 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 will see what those reimbursements look like. But generally, the contract provides for those to be reimbursed on a cost-plus basis.

Ric Prentiss — Raymond James — Analyst

Okay. Makes sense. And then, I think you mentioned also Barry, that there was a little bit of year-over-year difference on 5G costs. How should we think about what you have left to spend on the 5G, both opex and capex and what time you might start spending? Are you going to wait for the deal to close, or how should we think about the spreading of those 5G ATG costs?

Barry Rowan — Executive Vice President and Chief Financial Officer

Yeah. We’re in the middle of the opex spend, as we are 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 starts when we start in selling towers and equipment on the towers — not the towers, but the equipment on the towers. So we would expect to start seeing it happen next year, and then it will get rolled out in an appropriate sequencing and timeframe, and again, as we’ve said, the exact timing of that will be a part of this strategic planning process that we’re going through.

Ric Prentiss — Raymond James — Analyst

Okay. And you 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 keeps kind of being on the edge?

Oakleigh Thorne — President and Chief Executive Officer

You know, 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 than theirs and will be better than theirs. Our 5G product will not only use the 60 megahertz of unlicensed spectrum that they will use, that we will have, our 4 megahertz of licensed, clean spectrum, which will make the products a lot better wherever there is 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 are 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 face very strong competitors today in Viasat and Inmarsat, and they obviously are eyeing the BA market as a growth opportunity for them. So those are the ones we really focus on, and I guess the last point I’ll make about 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 and a lot of that is frankly in smaller fuselage airplanes, that we are better prepared to serve them, than Inmarsat and Viasat are.

So we think it’s a growth market. We’re not that focused on share, as we are on absolute growth and frankly — and right now, I think we’re uniquely positioned by virtue of having a product that performs better than anybody else’s product, with low latency right now. Also is 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 BA market. And you know, our proprietary spectrum.

So we view ourselves very competitive. Thankfully, are not as that worried about the SmartSky entrance and are focused on competing hard with the big guys, Inmarsat and Viasat at the top of the market.

Ric Prentiss — Raymond James — Analyst

Great, thanks guys. Hope you continue to be well.

Oakleigh Thorne — President and Chief Executive Officer

Thank you, Ric. Same to you as well.

Barry Rowan — Executive Vice President and Chief Financial Officer

Appreciate it.

Operator

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

Scott Searle — ROTH Capital Partners — Analyst

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

Oakleigh Thorne — President and Chief Executive Officer

Yeah, my lawyers would tell to make very clear, it wasn’t a ruling, it’s just that we got the 30-day period without a follow-up request.

Scott Searle — ROTH Capital Partners — Analyst

Okay. Fair enough. Hey I know you’ve mentioned this a couple of times in 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, and the difference is like a little less spending in terms of 5G, it looks like in the current quarter. So as we go into 2021, that is kind of normalized base level depending on what’s happening with 5G? Yes, that is 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 cost line, is under allocated corporate spend, it’s approximately $35 million 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, when it is concluded that we ought to be able to spend less on an external costs, the audit is 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. Great, thank you. And just following up on some of the BA metrics that 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 in other areas, 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 of over 200 in terms of new customers and new aircraft? Wonder if you could reconcile that for us, is that 200 plus number. How should we thinking about things on a more normalized basis going forward, and then I had one last final question?

Oakleigh Thorne — President and Chief Executive Officer

Yeah. The two — 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 shipped units to dealers, we put them in inventory to OEMs, who will also put them in inventory. So those are installed on planes over time, and then later activated. So the 500 number, of which 200 and some odd about 46% with new customers was activations, not units shipped. Okay. Does that make sense?

Scott Searle — ROTH Capital Partners — Analyst

It does. So Oak, 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?

Oakleigh Thorne — President and Chief Executive Officer

No. There is not much inventory sitting at dealers and it’s getting — as Ric noted, it will dry up a bit, because the units aren’t hitting the same — the units shipped aren’t as high the activations, and that’s a good indicator of future demand. So I think you’re right about that.

Scott Searle — ROTH Capital Partners — Analyst

And sorry, for regional utilization?

Barry Rowan — Executive Vice President and Chief Financial Officer

Go ahead Oak. You can take that one.

Oakleigh Thorne — President and Chief Executive Officer

Well, yeah, I mean — frankly we are — 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 the — it won’t sound like much, but if we think the average flight that you see on an hour, in a quarter, something like that is 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 are flying business, that summer is further away from the business than it was pre-COVID. In terms of the commercial aviation market, the Northeast has just the second COVID hit. The Northeast came down in terms of the number of flight departures in the south and the west went up. And that continues to hold. That hasn’t changed.

Scott Searle — ROTH Capital Partners — Analyst

Great. And lastly if I could; could you just give us an updated number in terms of the number of AVANCE or 5G ready aircraft that are out there at the current time? And in general, as it relates to 5G, you’ve got an opportunity to press some 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 closed at the end of the first quarter, do you guys get more aggressive in pushing on that front, to push our competitive advantage? Thanks.

Oakleigh Thorne — President and Chief Executive Officer

I’ll answer the last part, yes is the answer obviously. As soon as we have money in the bank, we’re going to try to move as fast as we can on 5G, and we’ll update people on our 5G plans at a later date. In terms of the AVANCE — I am sorry, go ahead. It’s about 1,500, I think we had a press release on that, not too long ago. There is maybe another 20 to 30 planes on top of that now.

Scott Searle — ROTH Capital Partners — Analyst

Great, thank you.

Operator

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

Louie DiPalma — William Blair — Analyst

Barry and Oak, good morning.

Oakleigh Thorne — President and Chief Executive Officer

Good morning, Louie.

Barry Rowan — Executive Vice President and Chief Financial Officer

Hi Louie.

Louie DiPalma — William Blair — Analyst

Intelsat in its deal rationale, discussed the benefits of going direct and that the CA asset would have likely fit with many other satcom owners and operators as well, that the deal helped Intelsat remain 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 to close the deal, not to close — the deal is consummated in the middle of the pandemic, and after you already disclosed the need to renegotiate the Delta 3 contract. So what could possibly trigger a deal termination, and is there anything that you are overly concerned about?

Oakleigh Thorne — President and Chief Executive Officer

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

Louie DiPalma — William Blair — Analyst

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?

Barry Rowan — Executive Vice President and Chief Financial Officer

As you know Louie, the transaction is subject to the customary working capital adjustments, transaction costs to come out of that and so on. So I wouldn’t speculate on what that number is going to be at this point and what the net number is on the $400 million. But I think an important part of all this is that, as we think about the refinancing and the transaction — on the heels of the transaction, is that, we will 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. So 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. You can obviously do the math, and see that it’s going to have a very significant positive impact from our cash position.

Louie DiPalma — William Blair — Analyst

Great. That’s it for me. Thanks guys.

Oakleigh Thorne — President and Chief Executive Officer

Thanks Louie.

Barry Rowan — Executive Vice President and Chief Financial Officer

Thanks Louie.

Operator

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

Oakleigh Thorne — President and Chief Executive Officer

Hey Greg.

Greg Gibas — Northland Securities — Analyst

Great, thanks. Hey, good morning, Oak and Barry, 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 75% 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, it 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 may be moved month over month within the quarter?

Oakleigh Thorne — President and Chief Executive Officer

You know, 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. You 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 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 not without that. Without knowing or with utmost certainty what’s going to happen, I’m not going to make any guesses on that front. Of the suspensions, you know, almost back to just the normal suspension level. We get — don’t hold me to the exact numbers, but we get 100, 150 suspensions every month, for people who have taken aircraft out of service and don’t want to pay for the service, while their planes are in the shop, and that’s the typical reason they suspend. And you know we’re under 300 now suspended from the timeframe that we talked about. While we are not in a 300 period, so we’re not that much higher frankly than our normal rate, if you will. So maybe — we have maybe double the number we normally have, but it’s not very high. But call it another 150, we’d be right down at the normal level.

So they’re coming back, they are coming back at this point, and it’s starting to slow a bit, but we’re also signing new customers and are getting a lot of new growth. So we think we’re pretty bullish on being able to grow — continue to grow units from here. To meet the dotted line.

Greg Gibas — Northland Securities — Analyst

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

Barry Rowan — Executive Vice President and Chief Financial Officer

Yeah the reason is — go ahead Oak.

Oakleigh Thorne — President and Chief Executive Officer

Well, I was just going to say, there is 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 11 functional teams, etc, etc and the exact reimbursement scheme is still being worked on there. 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, 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 — it’s something we’re going through right now, and we expect we’ll start to see some sales in 2022 as well. And we will give more sense of direction on that in future calls, when we have our transition plans in place.

Greg Gibas — Northland Securities — Analyst

Okay, great. Thank you.

Operator

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

Simon Flannery — Morgan Stanley — Analyst

Great, thank you. Good morning, everybody. So Oak, you were talking a little bit about the satellite space. Maybe you could just comment on the LEOs we got a SpaceX public data and how do you see the LEOs playing in the business aviation world going forward?

Oakleigh Thorne — President and Chief Executive Officer

Yeah, I think — we think that’s an opportunity for us and you know, one of the virtues of having coming out of staying 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 as ESA antennas come along and so we find that all interesting in a good market opportunity for us.

Simon Flannery — Morgan Stanley — Analyst

Okay, great. And on the delivery side, what are you hearing from the tech strongs 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?

Oakleigh Thorne — President and Chief Executive Officer

Yeah, I don’t, I don’t want to start angling of 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 is still a good deal of uncertainty on exactly what order is going to look like for next year. And you know 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.

Simon Flannery — Morgan Stanley — Analyst

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

Oakleigh Thorne — President and Chief Executive Officer

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

Simon Flannery — Morgan Stanley — Analyst

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

Oakleigh Thorne — President and Chief Executive Officer

Almost everything last quarter would have gone on [Indecipherable]. There weren’t many planes delivered that quarter.

Simon Flannery — Morgan Stanley — Analyst

Many thanks.

William Davis — Vice President, Investor Relations

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

Operator

Okay. And we will now turn the call back over to Mr. Oakleigh Thorne for closing remarks.

Oakleigh Thorne — President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks].

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

United Parcel Service (UPS) seems on track to regain lost strength

Cargo giant United Parcel Service, Inc. (NYSE: UPS) ended fiscal 2023 on a weak note, reporting lower revenues and profit for the fourth quarter. The company experienced a slowdown post-pandemic

IPO Alert: What to look for when Boundless Bio goes public

Boundless Bio is preparing to debut on the Nasdaq stock market this week, and become the latest addition to the list of biotech firms that have launched IPOs this year.

Nike (NKE) bets on innovation and partnerships to return to high growth

Sneaker giant Nike, Inc. (NYSE: NKE) has been going through a rough patch for some time, with sales coming under pressure from weak demand and rising competition. Post-pandemic, the company

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top