Gogo Inc. (GOGO) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 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. [Operator Instructions] Please be advised, today's conference call may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Will Davis, Vice President of Investor Relations. Sir, please proceed.

Thank you, and good morning, everyone. Welcome to Gogo's third quarter 2019 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, President and CEO; and Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described in our press release filed this morning, and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K, and 10-Q, and other documents we have filed with the SEC. In addition, please note that the date of this conference call is November 7, 2019. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. We include a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our third quarter earnings press release. This call is being broadcast on the Internet and available on the Investor Relations section of Gogo's Web site at ir.gogoair.com. The earnings press release is also available on the Web site. After management's 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.

Thanks, Will. Good morning and welcome to our Q3 2019 earnings call. We're pleased to announce a very strong quarter, with adjusted EBITDA and free cash flow well above our expectations. Though, as we predicted on our last call, service revenue is down as a result of the final American Airlines de-installs and conversion from turnkey to the airline-directed model. Though, we're not happy about that decline in revenue, it's worth noting that underlying growth has made up for a lot of that loss. We achieved $158 million of service revenue in Q3 this year, which is right about where service revenues stood the quarter the de-install program began in earnest, in early 2018. I'm also pleased that despite having an extra interest payment in the year, we remain on target to improve free cash flow by $100 million over the prior year. I'll leave the rest of the numbers to Barry, and now move on to some of the operational aspects of the business, and then I'll turn to strategy. It goes without saying that these are very exciting times at Gogo. As we scale our operations in support of Delta Airlines' desire to provide free Internet service to its passengers, as we made great progress on our Gogo 5G product initiative, and as we work with our satellite partners on new and exciting ways to serve the aero ISD market. It's also exciting to see a nice bounce back from our Business Aviation division as OEMs made some nice catch-up orders in the quarter, and some of the ADS-B congestion cleared up in the aftermarket. And perhaps most exciting, today, we expect to sign a contract with a very prestigious EMEA airline to install Gogo 2Ku and live TV on a significant portion of their wide-body fleet. A formal announcement will be forthcoming, but needless to say, I'm happy to get Gogo back to the wind tunnel. I'm very proud of my Gogo teammates for delivering such a great quarter. We've worked hard over the past year to improve our operations, execute on our strategy, and achieve our financial goals. And I think we're making great progress, so thank you. Let me touch on strategy for a minute, and then I'll turn to our three business segments to discuss some operational aspects of the quarter. The strategic front, today I'd like to talk about our network strategy. We believe that the market for and revenue from the connected aircraft is poised for accelerating growth as airlines increasingly look at providing free ISD to passengers, and as the aviation ecosystem looks for cheaper and faster ways to act as operational data. Our strategy is to take advantage of this explosion in demand by positioning ourselves as the provider of the most trusted broadband communication systems in the aviation ecosystem. Today, we serve that market with the two network solutions, the Ku satellite network, and an air-to-ground network. In the satellite world, we pursue an open architecture asset light operating model. Today, we work with 11 satellite providers and use 33 satellites to create and manage a seamless near-global network. Though we're band agnostic, today we operate in the Ku band because there are hundreds of Ku satellites, and we can lay our capacity where it's needed, we can scale as demand grows, and we can provide more redundancy than close Ka constellations. I want to highlight the importance of redundancy for just a second. In the last eight months, three important satellites have failed on orbit around launch. With the loss of Intelsat 29e this year Ku supply corners [ph] is tight. The Ku service providers have still been able to serve their customers by utilizing other Ku satellites. In contrast, if they were on a three-satellite closed Ka system the networks for one-third of the world would be dead to their airline customers for an extended period of time. The satellite world is going through a tremendous amount of change, and our asset light model gives us the flexibility to harness that change to do what is best for our customers. We see the cost of satellites come way down as manufacturer supply assembly line techniques to satellite manufacturing and as innovation in the launch sector drives down launch costs. That enables satellite operators to get more bang for their CapEx bucks and lower the unit price they charge service providers like Gogo. New software-defined payloads will improve capacity utilization, both for operators and for service providers like Gogo, further driving down our unit costs. The advent of LEO or NEO constellations should give us the ability to drive down latency, which will improve the user experience in our customers' aircraft and provide truly global coverage. Finally, we've always said that we were band agnostic, and with the arrival of more open Ka capacity we're getting the chance to prove that. And we've actually started pitching regional Ka solutions where appropriate. We'll have more to say on that in the future. Our satellite partners are talking to us about all these opportunities because we're a very attractive partner. ISD is the fastest growing market segment for satellite operators and we're the largest player in the ISD space. So if you want to play in this segment you want Gogo as a partner. Given all that change, we want to be nimble, take advantage of the best of what our satellite partners have to offer to deliver the best experience per the dollar of our airline and business jet owners. Now, let me turn to our air-to-ground network. Starting more than 25 years ago, Gogo pioneered air-to-ground networks for aviation. Today, our ATG 4G network supports more than 5,500 business aircraft, and more than 1,500 commercial aircraft. Our competitive advantages in ATG are our proprietary 4 megahertz spectrum, our deep knowledge of how to build ATG networks, and our portfolio of intellectual property. We've built three ATG networks, and are now building our fourth, Gogo 5G. We just announced our three strategic partners in making the new network come to live, Cisco, Airspan Networks, and FIRST RF Corp. All leading U.S.-based providers of wireless network technology. We'll be building our network on 5G standards and be able to deliver higher throughput and lower latency for a better passenger experience than potential competitive offerings. We'll also be bonding our 4 megahertz of licensed spectrum with 50 megahertz of unlicensed spectrum to provide more bandwidth than classic ATG products without sacrificing the resiliency that licensed spectrum provides. We are starting to talk about 5G to airlines for regional fleets and even some mainline fleets. And we are talking to business aviation owners, operators, and dealers about 5G for their business aircraft. And so far, we are getting a very positive response. We remain on track to deliver this product in 2021 and are very excited about the value it can create for our company and our partners. Now let me turn back to the quarter. As I said earlier, we had strong results though we want to cautious about Q4. The American de-installs and AD conversion will continue to be a drag on revenue versus prior year. Satellite expense will increase as more 2K aircraft come online, as usage grows, and as we ramp in anticipation of significantly more demand in 2020, and we expect to incur increased investments in key programs like line-fit and GOGO 5G. Some of these headwinds and others will persist into 2020, and Barry will discuss those in his comments. As far as our segment results, let me start with the star of the quarter, our BA division. Before I even get into the operational metrics, I want to talk about the National Business Aviation Association show I attended in Las Vegas two weeks ago. We announced our 5G partners. We had a great panel discussion and our booth was packed all week. It's a real pleasure to talk about BA customers. They love our products whether they have AVANCE or other classic products and love our service which is testimony to our great business aviation team. BA achieved record revenue, up 11% over prior year, record segment profit, and record aircraft online for the quarter. Equipment revenue significantly outperformed expectations due to advanced sales in both OEM and aftermarket channels. OEM sales were driven by some nice catch-up orders for our AVANCE L5, and aftermarket sales improved as some of the ADS-B congestion began to subside at the large dealers. We still expect to see some ADS-B related drag on aftermarket sales in the second quarter next year. But it's nice to see the logjam start to break. As a result of these trends, we are raising our previously revised 2019 revenue guidance for BA to the high end of $290 million to $300 million range we shared last quarter. Our BA division continues to exercise strong expense control in the quarter, and is expected to hit their cash flow target for the year despite the weak sales experienced in the first half. BA ATG installed plane count grew to 5,527, up 500 in aircraft -- 508 aircraft or 10% from Q3 2018 and increased by 65 aircraft in Q2 this year. Even more encouraging, we shipped 293 ATG units in the quarter almost as high as the record 296 ATG units shipped in Q3 last year. Service ARPU for ATG units grew to $387 per month, up 2.6% from $3008 per month in Q3 2018. We are now up to seven OEMs and advance into line-fit and expect two more in 2020, which bodes well for future equipment sales. We think our business aviation division is a great business. It addresses a large underpenetrated market as an exciting new product pipeline and provides a resilience recurring service revenue stream and it exhibits nice operating leverage because of the low fixed cost nature of our priority ATG network. Now let me make a few comments on the combined CA segments. And then dive into the rest of the world and North American segments separately. I will start with some good news which is that 2Ku product is operating well with record net promoter score at customers that provide us with NPS numbers. NPS scores have also improved nicely for our ATG network as traffic has been offloaded to our satellite network, and in fact at one customer, our ATG NPS beat some of our competitor's satellite NPS scores. We are also proud that Delta Air Lines who exclusively uses GOGO for WiFi in their aircraft won the prestigious APEX Passenger Choice Award for best WiFi voted on by 1.4 million passengers beating JetBlue, who won the year before and is supplied our competitor. Also on the positive side, we continue to make progress in supporting Delta Air Lines in their announced intension to bring free WiFi at their passenger base. We are very excited about this endeavor, however, we will leave it to Delta to announce their plans for what and when they plan to rollout. Turning to CA combined revenue, as we discussed in our Q2 call, Q3 was the first quarter to suffer the full impact of the American Airlines de-installs and transition from the turnkey model to the airline-directive model. In total, these changes created a $100 million hole in our service revenue from when de-install started early 2018, which we've been able to largely offset by growth that our other airlines in our business aviation division. Costs remained in check at CA this quarter, and we got some benefit from positive equipment margin as well. We now expect growth in aircraft online at our combined CA segments throughout our planning horizon, and feel that the CA segments will return the revenue growth in 2020. At the end of the quarter, we had almost 1,300 2Ku aircraft online, a net increase of 73 with another 845 in backlog, 62% of our 2Ku backlog is in rest of world, which represents great new revenue potential, and 38% is in North America, which are mostly ATG upgrades, and represents an opportunity for increased ARPA, as they moved to faster to 2Ku service. [Indiscernible] slightly in CA-NA over prior year, and we're down slightly in CA rest of world due to new fleet installations. The combined profits of the CA segments are slightly negative, but well ahead of expectations and well ahead of prior year. Overall, we expect a lot of activation activity in Q4, but still expect to be at the lowest end of our guidance of 400 to 475 installs for the year, as some airlines have held back claims to make up for mismatch deliveries, as others have delayed for internal scheduling reasons and some is resolved in the government shutdown earlier in the year. As far as the MAX is generally, we've installed seven for the year. In a total, we have a backlog of 36, which includes our first line fit Boeing aircraft scheduled for the fourth quarter this year. Obviously, that schedule could change given the fluid MAX situation, but when it does occur, it will be our first major OEM line fit installation and a watershed moment for Gogo. We had one first of type induction in Q3, the Cathay Pacific A330-300. In summary for the combined CA segments, we're excited about the potential of our CA business. Global wireless usage trends are solid and improving and will drive demand for free Wi-Fi and aircraft, which will spur demand for our products and services. And the total addressable market is large and relatively untapped. Only about 35% of aircraft globally installed with the broadband IFC product today. We believe there will be 18,000 new or retrofit aircraft installed with broadband over the next decade that we can win our fair share of that addressable market. Now, I'll get into a little detail on commercial aviation North America and then on commercial aviation rest of the world. We had 69 gross additions in CA-NA for the quarter down a little from 74 prior year, down from 92 to two. Net additions were negative 21 for the quarter, as many of the gross installs for ATG upgrade some airlines retired older ATG aircraft. We expect a significant uptick in installs for Q4, most of which will be turnkey ATG upgrade. I should note that as we look at Q4 we expect to take a small revenue hit from one-third party payer is experiencing financial difficulties. In rest of world obviously our new airline contract is our biggest news that more generally, we had a good quarter. We signed a restructured contract with one of our Latin American partners that will lower our equipment subsidies and approved Gogo cash flow over the next few years. As for installs, it was a seasonally slow quarter with 31 gross additions versus 50 for Q2 and one de-install. We expect to significantly increase in ROW installations for Q4, most of which will be under the airline directive model. And we should approach 200 net additions for the year. We plan to drive our road segment to profitability over the next few years by installing our backlog, ramping ARPA, reducing costs as line-fit gets completed, utilizing our Satcom capacity more efficiently and driving down Satcom unit costs. So, let me conclude my comments by saying that we had a strong first three quarters of the year, and though we're not all the way out in the woods. We've made great progress. With that, let me turn it over to Barry to do the numbers.

Thanks, Oak. Let's jump right in. Beginning with a summary of our third quarter results, Gogo delivered another great quarter financial performance with adjusted EBITDA and cash flow both substantially exceeding our expectations. This was the third quarter in a row that adjusted EBITDA exceeded $35 million. This quarter's outperformance was driven by a rebound and business aviation, and commercial aviation expenses remaining below budget. On a sequential basis, the CA equipment revenue was at 58% and segment profit was at $6 million. CA's up expenses have continued to run below plan for both Satcom and overall operating expenses. From January to September, we have delivered $111 million and adjusted EBITDA, exceeding 28 teams full year performance of $71 million by over 50%. We are raising our adjusted EBITDA guidance, as we have done in each of the last five quarters, this time to $120 million to $130 million dollars for the full year of 2019. At the midpoint, this represents a 76% year-over-year increase and adjusted EBITDA. In addition to the strong adjusted EBITDA performance, we have dramatically reduced our [indiscernible]. During the quarter we achieved record positive free cash flow of approximately $34 million. During the first three quarters at 28 teams, we burned $216 million in cash versus just $3 million for the comparable period this year. For the second quarter in a row on levered free cash flow was about $30 million at a positive $33 million. We continue to project positive unlevered free cash flow for the full year 2019. This improved cash flow performance is the result of the very strong adjusted EBITDA achieved during the first three quarters of the year, lower airborne equipment investments and improvements in net working capital. We are achieving the aggressive targets we set for reduce inventory purchases and improving accounts receivable during the year. As we've guided since the beginning of the year, we're on target to improve free cash flow this year by at least $100 million over 2018. This is a particularly important achievement considering that our net cash interest expense for the year will be $39 million higher in 2019 versus 2018. This year's higher interest expenses primarily due to making free interest payments on our senior secured debt during the year due to the timing of our refinancing. We are of course very pleased with the adjusted EBITDA and free cash flow poor performance we've been able to achieve for the first three quarters of 2019. However, we do want to make sure that we properly set expectations for the balance of the year. In that spirit, I'll offer some perspective on how we view both adjusted EBITDA and free cash flow developing for the fourth quarter. First, regarding adjusted EBITDA, our Satcom expenses still running well below plan. We do expect these expenses to increase again in the fourth quarter, as we enter into contracts to serve the increasing demand from our customers. In addition, some CA expenses were delayed from this quarter that we still expected incur in future periods. As you will know, our 2019 adjusted EBITDA guidance implies fourth quarter adjusted EBITDA of $19 million at the high end of the range. This compares to the over $35 million we achieved in each of the first three quarters. As we look at free cash flow for the fourth quarter, there are some known outflows that will reduce it from this quarter's record level. Given the free cash flow has improved by over $200 million for the first three quarters, let me highlight the primary reasons expected to come in closer to $100 million improvement for the year. First, we have $54 million in interest payments during the fourth quarter and have none in the third quarter. Secondly, we expect working capital to be a use of cash in the fourth quarter due to some anticipated swings and the timing of working capital. Before we turn to our operational performance, let me highlight a couple of additional points regarding our balance sheet. We did put the asset that loan facility in place as we indicated on our last earnings call. This $30 million facility carries an interest rate of LIBOR plus 2%, translating to approximately 4% of today's rate. While these funds are now available to us we have not drawn on the facility. We're also pleased that the debt instruments within our capital structure are performing well. Both the senior secured notes and 6% convertible notes are trading well above par. I will now turn to a discussion of our third quarter operating results starting at the consolidated level. Consolidating revenue was $201 million down 7% from a year-ago, reflecting plan reduction in revenue from American Airlines. Consolidated service revenue was $158 million for the quarter essentially flat from a year-ago. We expect revenue to increase in 2020 as we add new aircraft in CA and with an outlook for resumed growth in BA's total revenue. Our bottom line performance has benefited from disciplined cost management across both CA and BA. For the first nine months of this year, department and Satcom expenses are approximately $28 million below our internal budget on a combined basis. As we will discuss some of this expense benefit is timing related. While there is more we can do to continue driving operational and financial discipline in the company, it has improved substantially during the past year. Now, let's move to a discussion of the business segments starting with business aviation. We're very pleased to see the BA business rebound in the third quarter. Total revenue for BA increased to $81 million, up 11% from the third quarter of 2018 as both service and equipment revenue grew during this quarter. Service revenue increased to $55 million up 12% from the prior-year period. This was primarily driven by a 10% increase in ATG aircraft online $5527 at the end of the quarter. Monthly service revenue for ATG aircraft online increased to $3,087, up nearly 3% from $3,008 in the prior-year period. The weakening trends in equipment revenues we saw during the first half of the year tied to the ADSP delay are starting to reverse. BA equipment revenue increased 58% sequentially on the strength of our Premier event L5 product line. We are seeing OEM to accelerate their purchases ahead of plan to airframe sales, and dealers are again building inventory. Equipment revenue for this quarter matched the all-time high of $26 million, achieved in the second quarter of 2018 during the highly successful events product rollout. Driven by this growth in equipment revenue and an attractive product mix, BA equipment margins increased from 28% in the second quarter of this year to 43% this quarter. This is back in line with BA's historical equipment margin. Segment profit of $37 million was up sequentially by $6 million or 18%, primarily driven by the growth in revenue. Based on these strong operating results segment profit margin grew to 45.4% during the quarter, up from 43.9% sequentially. Now, I'll turn to a discussion of our commercial aviation division, starting with CA North America and rest of world on a combined basis. It's worth highlighting three developments with four separate airlines which influenced CA's results this quarter and going forward. First is the completion of the American Airlines de-installation and the full impact of the airline switch to the airline directed model. This has meaningfully reduced our revenue and associated profitability, as I've mentioned and will make for a difficult comparison through the second quarter of 2020. Second is successful renegotiation of the contract with a Latin American carrier, as also described. This represents a significant improvement in the five-year NPV of the contract, and is a great validation of one of the key objectives we established as part of our integrated business plan. Third, we sit on our February earnings call that we expected two airlines to switch back from the airline directed business model for the turnkey business model during 2019. The first one of these occurred in the first quarter, and the second occurred in the third quarter. The headlines for our commercial aviation business in 2019 are even as CA has endured some significant headwinds, service revenue for the first nine months is up almost 3% over the same period last year, and CA's bottom line has performed well ahead of expectation due to strong cost controls and the timing of expenses. For the first three quarters of last year, CA segment profit was negative $52 million. For the first three quarters of this year, it is a positive $10 million, including a modest loss and less than $2 million this quarter. Importantly, the $62 million segment profit improvement also reflects a considerable narrowing of the year-to-date losses in CA row. The strong CA segment profit is largely due to Satcom expenses under running plan and the reduction in other operating expenses we targeted. We anticipate that our Satcom expense will come in more than $15 million below our 2019 budget. However, we do expect Satcom expenses to increase again on an absolute basis in the fourth quarter, and next year to meet the demand created by growing passenger usage. As you will recall, through our integrated business planning process, we identified $75 million in annual savings in CA department spend excluding Satcom expense between the time we announced that plan in mid-2018, and the end of 2020. On our last earnings call, we said we expected to achieve approximately $45 million of those savings, or 60% of the target this year. We now expect to achieve approximately $50 million or two-thirds of that production this year. However, it is also important to note that some of this is due to deferred expenses which we expect to incur in future periods. CA's $62 million improvement in year-to-date segment profits over the previous year has clearly been a major contributor to our dramatically improving free cash flow performance this year. In parallel, we've also made significant strides in working capital management. Most of the cash flow improvement from working capital has come through our planned slowing of inventory purchases and improving accounts receivable. Now I'll turn to a discussion of the operating results for commercial aviation in North America. Total revenue for CA-NA decreased to $84 million in the third quarter, down 22% from the third quarter of 2018 reflecting anticipated declines in both service and equipment revenue. Service revenue was approximately $80 million down 14% from the third quarter of 2018 primarily due to the impact of American Airlines. Excluding this airline, service revenue was up 7% over the prior-year. We continue to expect revenue growth to resume for CA-NA in 2020. Equipment revenue declined 76% to $3.7 million as compared with $15 million for the prior-year period. This decline was due to lower 2Ku installations and a shift in mix from airline directed to turnkey installations. As Oak described, we expect total 2Ku installations to increase meaningfully in the fourth quarter on a sequential basis. Total take rates for CA-NA grew year-over-year to 12.7% and excluding American Airlines net ARPA was up 3% year-over-year to $132,000. Largely driven by expenses coming in well below plan, CA-NA contributed about $42 million of the over $60 million improvement in CA's combined segment profit for the first nine months of this year. Now let's turn to CA-ROW which also delivered a strong third quarter. CA-ROW total revenue was approximately $36 million, up 1% from a year-ago, service revenue increased to $22.6 million, up 28% from the third quarter of 2018 as we brought additional aircraft online. Equipment revenue decreased to $13.1 million down from $17.6 million in the third quarter of 2018 due to lower number of installs under the airline directed model. As expected, ROW take rates and ARPA both decreased over the year-ago quarter due to the significant growth in new aircraft fleets coming online. As we described on previous calls, both the ARPA and take rates are substantially higher for existing airlines as a new aircraft fleets mature. Aircraft from new airlines represented 49% of total ROW aircraft online at the end of the quarter, up from 30% a year-ago. ROW aircraft online increased to 721, up 41% from 513 as of September 30 2018. And we still have that healthy backlog of over 500 aircraft to be installed. We're very pleased to see the loss of narrowing for CA-ROW segment. Segment loss and CA-ROW of $13.7 million improved 40% over the prior year period, driven by higher service revenue, continuing improvement in fact capitalization and lower operating expenses. Through the first three quarters of this year, we reduce loan losses by nearly 30% from negative $70 million in 2018 to negative $50 million for the comparable nine-month period this year. I will now turn to a discussion about 2019 guidance, which is summarized as follows. Total consolidate revenue and the range of $800 million to $850 million is unchanged. We expect CA-NA revenue to be at the high end of the previously guided range of $355 to $380 million with approximately 5% from equipment revenue. No change from prior guidance. We expect CA-ROW revenue to be at the high end of the previously guided range of $135 million to $150 million with approximately 40% coming from equipment revenue, no change from prior guidance. We now expect CA revenue to be at the high end of the previously revised range of $290 million to $300 million. We're raising our adjusted EBITDA guidance to range of $120 million to $130 million and increase from a prior guidance of $105 million to $115 million. As a reminder, the adjusted EBITDA guidance provided on our February 2019 call was $75 million to $95 million. We expect an increase in 2Ku aircraft online to be at the low end of the previously guided range of $400 million to $475 million. We won't be discussing 2020 guidance on this call; we thought it might be helpful to offer some perspective on the puts to takes as we look forward to next year. We're very positive about the progress we've made in the last 12 months, as evidenced by this year's strong financial performance. But we also want investors to maintain a balanced perspective as we continue to build on GOGO achievement, and assessing or 2019 performance, we report to recognize the year-to-date adjusted EBITDA has benefited from about $9 million of non-recurring items. Now, as we look to 2020, within BA will be making meaningful investments in our 5G network in preparation for this commercial rollout plan for 2021. These plans are new, but a worth reiterating now that we have named our 5G vendors. CA revenue rebounded well in this quarter, but we're monitoring the potential impact on longer-term service revenue from a temporary delays and equipment sales due to a ADSP. In CA, we will have effectively lacked the issues with American Airlines by the third quarter of 2020, including de-installs and the airline's completing it shifted to the airline directed business model. As I said previously, 2019 is also benefiting from the deferral of some operating expenses in the future periods and some additional programs spending will occur in 2020. Finally, regarding cash flow, we're extremely pleased with the progress we've made in 2019, but do bear in mind with these results reflect a meaningful portion of the cash flow improvements we had targeted to come from working capital, which are largely non-recurring. As I conclude my prepared remarks, I want to join me in thanking our tremendously committed employees for their contribution to our strong financial results. I also want to add my thanks to our investors. Operator, we're now ready for our first question.

[Operator Instructions] Our first question comes from Philip Cusick of JP Morgan. Your line is open.

Hey, guys. Two, I guess, first, congratulations on the deal to be signed today, can you give us, Oak, an idea of the scale of that contract and what type of usage the customer envisions? Maybe what kind of competition did you see on that? And then Barry, you were just going through some of the issues in jumping off from 2019 EBITDA and free cash flow into 2020. Not to ask you for guidance yet for 2020, but maybe if you can give us some of the net impacts on both of those numbers that would be helpful? Thank you.

Yes, Phil. Oakleigh first, yes, I don't want to get in front of the airways' announcement so I don't want to go too far, but I'll say that it's a global road structure wide-body jets. We are -- the competition were other ISD players that can offer global coverage, the usually suspects there. I think they are impressed with the quality of 2Ku, they flew it a lot on other airlines, and I would say as an airline it's extremely focused on quality and service. So it's very rewarding to win that deal. It's a -- both 2Ku as well as our IPTV product.

That's great.

And, Phil, on your question about 2020, thanks for not pressing us for giving guidance on this call. As you know, we do that on our fourth quarter call, and we're still in the midst of budgeting for next year. But here are some things to think about. So this year, there is that $9 million one-time benefit adjusted EBITDA in 2019. As we look at next year, the IBP savings are coming in ahead of plan. As we said coming into the year, we expected about half of those will more to be realized, half of the $75 million this year. And now it is more like two-third of the $50 million, so that certainly helps. I would say on the IBP, really most of the operational disciplines and process improvements are happening as planned. There's one project running behind plan, it'll extend throughout 2020 having to do with driving efficiency and production operations. And we will look to be increasing some expenses for some of the important investment areas, 5G being the major one and BA. And then that's on the order on the OpEx side of kind of $10 million to $15 million. And we'll also be doing things like adding to our really talented satellite team to meet the significant demand. And then maybe some programs also that we would implement to take advantage of some new opportunities, things like line-fit and so on. So, hopefully that gives you a little more color on how to view 2020 unfolding.

Thank you. Our next question…

Okay.

Thank you. Our next question comes from Lance Vitanza of Cowen. Your line is open.

Hi, guys. Thanks for taking the questions and nice job on the quarter. On the business aviation segment, you obviously talked a lot about kind of rolling past the FAA ADS-B installation mandates. Those were a big deal in second quarter. I'm guessing that you didn't really see any impact of that in the third quarter, given the near record volume of shipments. But was that true or was there perhaps even some lingering impact in the beginning of the quarter maybe? And I guess I'm just trying to think about what, if anything, that suggests over the next few quarters.

Yes, no, there's still impact. In talking to the dealers, they have -- the big dealers in particular have handled all the larger aircraft at this point. There are more, I'd say, lower value hauls that are still getting ADS-B. They've moved a lot of that out to what they call satellite facilities, so more remote airports where they have hangers, et cetera. And they've been able to open up shop floor space in their major facilities and get back to selling ISD and other products which are frankly more profitable than ADS-B is. So that said, there's still some pressure there, and I think we expect to see ADS-B installs continue through the first-half of next year. I think the dealers expect that. So, I don't think we're fully out of the woods on it, but it was nice to see it pick up in those orders. Remember, those aren't all activations, those are units that are shipped. In the BA business we sell on then we book revenue when we ship to the OEM or the dealer. They then actually install those, so some of those will go in the shelf and be installed over time.

And just to add to -- or explain about the mix on OEM versus aftermarket, I mean the OEM has particularly picked up, and so you see the impact of ADS-B on the aftermarket side, so that's what we're -- we'll still continue to see that during the course of the year.

Great. And then if I could just ask a follow-up, again in the BA segment, but the monthly revenue for aircraft online on the ATG side, for the last several quarters it's been sort of stuck in the low single-digit range. Is that just sort of what we should expect going forward, or do you see an opportunity for reacceleration either under the current AVANCE L5 program or perhaps when you've eventually rolled out the 5G systems?

So, are you asking about ARPU in the ATG part?

Yes.

Yes, well, there's a little bit of downward pressure there because the people had unlimited -- a lot of people were buying unlimited plans, when [indiscernible] first rolled out, and of course when they go over certain thresholds they would be getting charged more, et cetera, et cetera. And so they've gone to more managed plans, I guess. And so that's been a little bit downward pressure slowing it down, but you still see a lot of people upgrading plans as well. We don't have 5G -- I wouldn't want to get it out and speculate too much about what our 5G pricing for plans will be. We have not decided that yet.

Okay, thanks, guys.

Thanks. Lance.

Thank you. Our next question comes from Scott Searle of ROTH Capital. Your line is open.

Hey, good morning. Thanks for taking my questions. Nice job on the quarter, guys. Just a real quick question on Satcom capacity, I know you guys have been working hard to go back, renegotiate, expand the footprint to give you guys some diversity and reliability and backup in terms of satellite failures. But can you help us understand how some of those contract renegotiations get feathered into your Satcom costs, particularly on the international front where utilization is a lot lower just given the number of aircraft that are currently live. And if you could extrapolate that now with the new EMEA customer and 500 aircraft in backlog, does that get you to breakeven results in international once they're fully deployed? Thanks.

Well, let's start with the renewals. I mean most of the -- when we're renewing now we're using -- first of all, we're not using renewing on the same satellite, we're committing to a new satellite, like we did with Eutelsat 10B, which was announced, I think, last week. And those new satellites are at much lower unit cost than the contracts that are rolling off, so dramatically lower. So those are improving our economics in rest-of-world, and that's going to be one of the major drivers towards profitability in that division. I'm sorry, the second part of your question on capacity was?

Well, Oak, just kind of extrapolating your backlog out in the rest-of-world with 500 aircraft, plus the new deal that's announced today. As you start to get some better utilization with that footprint and better costs does that get you to breakeven just deploying against what you've got visibility and under contract to now in international markets? Thanks.

Yes, Scott, I mean as we've said, and as Oak kind of reiterated on this call, the drivers remain what they've been, of getting those installed, increase the ARPU of new fleets, expenses as we do see some of the OEM costs coming down over time as we get those programs behind us and so on. Clearly the increased demand being driven for satellite capacity helps worldwide, so just got to underscore Oak's point on that. And I would also say that this order that we're announcing today certainly helps, and you also saw the announcement that we made about Eutelsat for capacity over that region, so that also helps as current contracts come up and we're able to deploy that 10B satellite at attractive pricing. So, I wouldn't want to say specifically about what that looks like for [indiscernible] clearly, this helps, and it's as part of the strategy that add our lines in those regions where we have excess capacity and can drive it down, and continue to drive the cost structure lower.

Great, thank you. Nice quarter.

Thanks, Scott.

Thank you. Our next question comes from Ric Prentiss of Raymond James. Your line is open.

Thanks. Good morning, guys.

Good morning.

A couple of questions if I could, I want to follow-up on some of Phil's questions on in particular to the Satcom. If I wrote the numbers down fast enough there that you were giving, it sounded like Satcom is down $20 million below plan year-to-date, but that for the year it might be $15 million. Is that kind of the timing item you were getting out of just increased demand?

Yes, Ric, just to clarify, that $28 million year-to-date was the amount that we under for Satcom as well as the department operating expenses. And then for the year, we expect Satcom to be $15 million below the budget. And just as a reminder, it's growing, of course on an absolute basis from second quarter, and third quarter will grow again, and fourth quarter as the demand grows, but it's still even with that growth in absolute terms It's RUNNING below plan along the lines I talked about.

Sure. And as far as versus plan, is that your internal plan, or is that kind of the plan you would have to communicate in the Street, is it doing like, significantly better than the internal plan as well?

Yes, no, that's versus the internal plan, so…

Okay.

And so, and we've talked about the EBITDA exceeding expectations, certainly is true versus the Street, but it's also true based on the internal budget, because of these expenses coming in below plan and we talked about that, on the last call that part of that is due to the great work by the engineering team which we put policy management in place and as we introduced new network elements like modems, that helps the overall usage to deliver the same user experience. So, a part of that has been the benefit of that kind of engineering work.

Okay. And again, in the early prepared remarks, Oak, you might have mentioned something about revenue hit in fourth quarter from a third-party payer, can you help us frame that, what kind of size you're talking about which line item that would hit?

Yes, it's a couple of million, and it's -- I'll tell you it's iPass, which is, you know, it's pretty public how the financial troubles that their parent company is in.

Okay. The last one from me, obviously, it's up to Delta to make the announcement, but what kind of timeframe should we be expecting updates from Delta kind of a review of unlimited Wi-Fi, is there a timeline you can at least poised to keep watching for?

No. I go down to Delta pretty regularly, and it's pretty well articulated to me that they prefer to make those announcements themselves. So, we're going to see to their wishes. Our job is to support them operationally and let them manage the program commercially.

Sure. And any final update on the MAX delays, how it affects, your business looks like it's slipping out into 1Q obviously, but just kind of help us update the thought of what MAX delays are meaning to not just installs, but then also service revenues?

Yes, I'll let Barry get to the service revenue component of it, but I don't know that we really calculated. We don't have a lot of matches. I mean, we've got, like I said, there's 36 in backlog, which includes the seven that have already been installed. So we'd have, you know, presumably ARPA already from 36 more aircrafts, you can take an average ARPA number and multiply times that would kind of be the hit I think, I'm sure, Max planes. And then of course, they are the planes that are not being given to us for installs. It's kind of hard to quantify that exactly. We actually try queue to this call, because when the airlines start delaying things, often there is a raft of reasons, MAX delays might be one of them, right? They're not going to get the MAX. So they need to keep some other plane service and can't give it to us for a two-day install. So we can't really quantify that, but I would say, there's been roughly 100 installs that got pushed out on us this year. MAX is probably 25%, 30% of those, something like that.

Yes.

That's what we sort of roughly estimate.

And Rick, the revenue impact is really very small.

Yes.

Yes.

At least for now, for sure, and obviously, the MAX is a big part of our future. Once we are line-fit on that, that aircraft, that's an aircraft that will be -- there will be a lot of those manufacturers presumably, and it'll be one of the leading aircraft in the world in terms of unit counts. So, line-fit on that is very important.

Great, thanks for the answers.

Thanks, Ric.

Thank you. Our next question comes from Louie DiPalma of William Blair. Your line is open.

Good morning, Barry, and Will.

Good morning.

Hey, Louie, how are you?

Not bad. Free cash flow generation has never really been associated with Gogo, and appropriately you announced further measures to improve free cash flow on this earnings call on top of this quarter's strong performance. Is the general plan to refinance your debt in June of 2021, assuming that you're still an independent company then?

Yes, let me take those one at a time, Louie. First, on the question about improvements of free cash flow, yes, the drivers of that have been increased EBITDA, the working capital management, and the benefit from lower airborne equipment investment. What I tried to say is that, we've had a really an really extraordinary improvement in free cash flow of $207 million in the first three quarters. That that improvement over last year will decline as we exit the year for the reasons I mentioned. So, we have over $50 million interest payment in the fourth quarter, and we also expect there to be a use of cash from working capital in the fourth quarter. So, that'll take the improvement year-over-year in free cash flow performance down from where it is year-to-date, but still we feel very good about achieving at least $100 million improvement year-over-year. Regarding your question on refinancing, yes, because when we did the refinancing of the $925 million, we purposefully took a slightly took a lower-term and we could have taken five years. So we did a five-year term with a two-year non-call period and it's with the understanding that that would enable us to refinance sooner, we expected at that time and still do for continuing improvements in the operations. And even though we got a good improvement in the interest rate, during the last refinancing, we expect to continue to be able to be in a position to refinance for the balance sheet at more and more attractive rate. So, in terms of the timing of the next big event is the maturity of the 6% convertible notes, which is in May of 2022. So you could look to us, getting something done with that in more than a year in advance of that is the way we think about that. So that puts you into getting something done by early 2021.

Sounds good. And now I have an extended high level industry question, Oak, I want you to address the topic of industry pricing power and negotiating leverage. It seems that when airlines had your ATG solution or no in-flight Wi-Fi solution at all, it seems that the airlines had all the pricing power and that manifested itself with how the airlines especially your largest partners, pressure you for heavy subsidies, which is why you accumulated over a billion dollars of debt. Now that satellite antenna across the industry is now on over 8,000 planes. Is there any evidence that airlines have switched a material number of planes from one Satcom antenna to another and even if the Satcom solution is considered poor, is there any evidence of switching from one Satcom provider to another, so whereas the airlines brutally exercise their pricing power over Gogo for the past decade. Is it possible that all of the in-flight connectivity service providers have some degree of pricing power? Now when negotiating contract amendments since they have a Satcom antenna that seems very difficult to switch off?

That was a rich and long question. So I think in the early days, we would subsidize antennas heavily in order to win airline, in anticipation and those are usually turnkey deals where we then had the commercial right on the aircraft to sell our product and to bring in third-party payers et cetera and get the world is obviously switching more to an airline directed model, where the airlines want to control more of that, especially the large airlines and so they're getting probably more sensitive on costs. They never had costs in the turnkey model, but they do have costs in the airline directive model because they're the ones that are paying us for sessions are getting a sponsor to pay us. So I think that there is less sensitivity on the equipment side, most of our deals today are not heavily subsidized. Very few of them are, maybe there's still some old deals abroad right that were somewhat subsidized a little bit but there are new deals are pretty much all costs, are very close to cost on the equipment. And then there I think the airlines are going more price sensitive on the tests and especially as they look at going free. So we are very focused on driving our unit costs down, our Satcom unit costs down and with 2Ku and other ways of delivering more efficient solutions to the airlines and our competitors can and so I think that might answer your question. On the renewals, the renewals of these contracts are long contracts generally. So there have been very few renewals. We did renew American Airlines earlier this year because they have unusually short contract with us. And we announced that a quarter call and they were I failed it less price sensitive than they've been in the past, but as I said, I think that service pricing is going to be where there's going to be competition going forward. It makes sense, Barry?

Okay.

Thanks, guys.

Thanks, Louie.

Thank you. Our next question comes from Simon Flannery of Morgan Stanley. Your line is open.

Good morning. This is Landon Park on for Simon. I was just wondering if you could expand on any other conversations you're having with your partners around offering free Wi-Fi, and you also made some illusions to tightness in the Continental U.S. satellite supply market. So how should we think about your ability to meaningfully ramp your service offerings in North America, and when new supply might be coming online to support new services?

Yes, I think that the - what I was alluding to was that -- 20-9E, which had 9.3 gig of KU on it, mostly it went out of service earlier the fair amount of capacity out of the U.S. market, but there's capacity for what we're trying to do. Right now, we are still in negotiation with a number of players. We got eight different suppliers we're working with, and we're focused on getting the right pricing with them and we're able to start a lot of competition between them. So we feel pretty good about that. That's the capacity part of your question, and what was the other part of your question?

Any other conversations you're having with your partners around free Wi-Fi…

Yes, I mean, it's the conversation every airline of course, some of them think it's great and some of them are scared to death of it, but feel that they may have to react if one of the big majors goes free, what are they going to do? They're going to probably have to go free as well. So I think free will sweep across the industry over the next, say, five years. Different airlines will do that differently. Lower cost airlines are not going to give away high quality sessions probably, but they're probably going to give away something. And they will be everything in between. So yes, it's a major airline stock.

All right, and one last one. CA-NA ARPA was modestly down year-over-year, how should we be thinking about that as we move into 2020 and as we start to fully lap the American de-installs.

Yes. So, as you look at this quarter versus last land, and that doesn't reflect the impact of American Airlines, their full shift to the airline directed model. Also in the second quarter did have a onetime benefit from the renegotiation of that contract that we talked about on the last call. If you look at that quarter, also excluding American Airlines, it did include in the second quarter of the revenue from the distressed customer that was described. And so we're not accounting for that revenue until we see what happens with them. And then there's some seasonality of it in Q3. And as we look forward to 2020, we will still see that impact American Airlines and that'll be with us on a comparable basis through the second quarter and we see our sort of flattish from the current level. But I would point out that we do as we said expect revenue growth and CA-NA in the 2020. And then, of course, you know, the biggest discontinuity and all of this is a major airline going for you, other airlines going for you, which is going to completely change the level of take rates and as we go forward, and so that that really has been what we've been playing for, since two key you got established and, and putting in a much better pipe to the plane. So that's such an exciting development for us.

All right, thank you very much.

Thanks, Landon.

Thank you. Our last question comes from Greg Gibas of Northland Securities. Your line is open.

Good morning guys. Thanks for taking my questions and congrats on the quarter. I understand you didn't want to say too much here, but when should we expected to see the installs from the newly signed airlines to begin and can you really give us a better sense of how large that fleet sizes on a relative basis maybe?

Install start in 2020, and I think if I start talking about relative size and geographies, people probably factor too much in on what the airline is. And I don't want to do that because last thing I want to do is piss them off on the day we are signing the contract.

Fair enough. And then secondly, it looks like you continue to have that dynamic of new airlines and rest of world that install 2K. You would have roughly half the rate levels that we have seen on seasoned aircraft. So I guess I was just kind of wondering roughly how long does it take for those new airlines to reach those seasoned take rate levels. And is there any color you can provide on how those take rate grow over time and when we can start to see the rest of the world take rates start to improve again?

Yes. So, you are right, Greg, and it's about half as we look at that, so -- and it's for the reason that you pointed out. I mean it actually varies a fair bit by airline, I mean generally it's several years, but there have also been airlines where it can happen faster, so -- particularly in a world where there is an impetus to go free. So, as airlines do that, and now that that's out there and some airlines are doing that internationally that in some cases can accelerate it, but generally, we for internal purposes do model that to take several years. And there are two parts to that that matter. One is that the full fleets really need to be installed because an airline is not going to promote the WiFi service until they can demonstrate they offer it on every plane. So, you don't want to get on a plane where it doesn't have service. And then secondly even when once the service or once the planes are fully installed, it generally take some time for them to sort through exactly what their offering is going to be and they tend to tweak that and leg in into their ultimate WiFi offering.

Yes. I mean I would just add that that international wide body fleets that are fully installed tend to have our highest ARPA numbers, but they are the hardest to install. They are traveling international groups, because they are really utilized very heavily and getting them out of service to install takes more time. So, some of our great European brands we have been installing for two years so and we have still got time to go in order to get them fully installed. And again, it's really because those aircraft spend so much time in the air that it's harder than with the domestic fleet where [indiscernible] knows the tail and just bang in and churn them up. So, I think they are longer, but the reward is much better, is the way I look at it.

Got it. That's helpful. Thank you.

Thanks, Greg.

Thank you.

All right.

I would now like to turn the conference back over to Mr. Oakleigh Thorne for any closing remarks.

Thank you, and thank you for attending our Q3 2019 earnings conference call. I would like to leave you with a few thoughts. First, we have a very strong cash flow generating business in BA. Not only does it have a unique competitive advantage by virtue of our spectrum ownership but it's also a relatively un-penetrated market and has amply runway for growth. Second, Commercial Aviation Rest of World is growing. It's also an extremely large and un-penetrated market. And with our global 2Ku platform, our progress in line-fit and our strong backlog we are well positioned to win our share in that attractive market. Third, Commercial Aviation North America revenue is bottoming out as the impact of American airlines de-installs and their conversion to the airline directed model is finally model is finally behind us and we expect to start growing revenue again next year. Fourth, we strengthen our balance sheet given our sales strategic flexibility by pushing our Senior Notes out to 2024 and further strengthen our balance sheet this quarter by closing our $30 million ADL. And finally by virtue of our industry-leading market share and our asset-light operating model, we are well-positioned to take advantage of the opportunities affords to us by the satellite industry, and we look forward to demonstrating that to you in the quarters to come. Thank you again for your time, and look forward to talk to you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.