Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Gogo Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your speaker today, Will Davis, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Sonia. And good morning, everyone. Welcome to Gogo's fourth quarter 2019 earnings conference call. Joining me today to talk about our results are 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 the conference call. These risk factors are described in our press release filed this morning, and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is March 13, 2020. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both, GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter earnings press release. This call is being broadcast on the Internet and available on the Investor Relations section of Gogo's website at ir.gogoair.com. The earnings press release is also available on the website. After management's comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks, Will. Good morning and welcome. We have a great fourth quarter and a great full year but the stocks down substantially in recent weeks. With uncertainly around the coronavirus, and the Delta Airlines free WiFi program, people are less interested in past performance than they are in trying to understand future unknown. So, I'm just going to start with the coronavirus today, and then discuss in order the Delta free program, and then get back to some of the fundamentals of our business trends in the satellite industry that are driving down our costs, then discuss industry consolidation, and how we might fit into that consolidation and discuss a change we're making into our equity compensation plans. And finally, I'll discuss the quarter and the year and provide some high level thoughts on what will be very difficult to predict 2020. So let me start with the news of the day, the coronavirus. This is a very, very, very fast moving situation in our industry. And in fact, a great deal has just changed in the last 48 hours. Needless to say, our primary concern is the health and safety of our employees and our customers, but our net concern is with the financial health of Gogo. As I've discuss the impact of coronavirus on our different CA regions, I think it'd be helpful to give you the regional breakout of our 2019 in air sales revenue via frame of reference [ph]. Roughly 73% of our in-air revenue from flights originating in North America, 19% originating in Asia, 5% in Europe, and 3% somewhere else. In January and February, we are on-track for a great start to the year at both, our business aviation division and our commercial aviation division. And two weeks ago, we started to see a…

Thanks, Oak. And good morning, everyone. I'll start with an overview of our financial and operating performance and conclude with a summary of our approach to the way we're handling our 2020 outlook and the context of the coronavirus outbreak. Gogo delivered another strong quarter and year with adjusted EBITDA in the mid-$30 million range for the fourth quarter in a row, record annual segment profit for both, BA and CA, and $163 million improvement in free cash flow in 2019 as compared to 2018. 2019 adjusted EBITDA of $146 million was more than double the $71 million achieved in 2018, and over 70% above the midpoint of the expectations we set coming into 2019. As Oak mentioned, there were some non-recurring benefits included in the 2019 results but even considering those factors 2019 represented a dramatic turnaround in Gogo's financial performance. In addition to the strong adjusted EBITDA performance, we reduced our cash burn during the year very substantially. For the first time since Gogo went public seven years ago, the company achieved positive unlevered free cash flow on an annual basis, and it was meaningful at $85 million. The $163 million improvement in free cash flow over 2018 was well ahead of at least $100 million improvement we guided to coming into the year. And this was despite $39 million more in interest payments in 2019 due to the refinancing we completed in May. This improved cash flow performance is the result of three factors; lower investment in airborne equipment, adjusted EBITDA coming in well ahead of plan, and improvements in other working capital, primarily accounts receivable. We exceeded the aggressive targets we set for reducing inventory purchases and improving accounts receivable during the year. This pulled forward some of the improved cash flow performance we had previously…

Thank you. [Operator Instructions] Our first question comes from Scott Searle of ROTH Capital. Your line is now open.

Good morning. Thanks for taking my questions. Oak and Barry, great job in the fourth quarter. I know it's an unprecedented environment that we're operating in, so we really appreciate the thoughtful commentary, both to business and the industry, and really appreciate the transparency. Barry, just quickly, in terms of gross margins within CA services, it looked like it was down; I wonder if you could clarify if there was anything going on there? And then if I could, on the CA side of the business, can you give us some idea in terms of what subscriptions revenue looks like relative to one-time usage? Or maybe give us an idea of what the real-time ARPA per plane is looking like on a daily basis to help us kind of calibrate the impact that's ongoing? And lastly, if I could on the BA front, it continues to do extremely well, it seems like it's unfazed at this point in time. I was wondering if you had any additional color related to traffic patterns with private jets in general, that you're seeing on that front? And remind us in terms of some of the contracts because it's subscription based, you know, what historic churn maybe has been? What cancellation policies look like because it still looks like that business is pretty healthy? And I know the parallels early in terms of the international travel in the Asia Pacific region were still strong, and actually increasing; I'm wondering if there has been any near-term impact on that front? Thanks. And I apologize for the lengthy questions.

This is Oak. I'll try and take a couple of those and I'll turn it over to Barry for the margin question. We don't -- I mean, in terms of ARPA per aircraft, I can't really give you that for this week. We -- you know, the way our reporting works is we don't get that on a daily basis, we should but we don't. Trends; I noted the trends week, we see big airline customers in the US down around 15%, yesterday's numbers we're off -- down a little bit, it's interesting take rates -- yesterday take rates were quite high, flights were about even with the week before but I suspect load factors were much lower because revenue was down. So that's kind of the current view of what's going on in the North American market. The US -- about Business Aviation, we actually have been talking to our charter customers, as well as some of the fleet operators. There have been a few cancellations on the corporate side because events are being called off etcetera, and there has been a sort of a pickup on what I call the personal side of people needing to get from point A to point B, and not wanting to take a commercial airlines or unable to take commercial airlines. So that's that one -- US ARPA, US-DA [ph], what -- what was the one on the Pacific? I'm sorry, your Asia Pacific question.

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

Yes, BA; now we've moved the whole ATG network into the BA segment to run out of Business Aviation. So, it is a self -contained unit at this point, and it could be split off quite easily. So, we did that so that we could demonstrate the value of the two businesses in a pretty clean way. I'll turn it over to Barry to talk about the gross margin and CA.

Yes, Scott. The primary drivers in CA North America, it was an increase in the dollar spend in Satcom, the actual department costs came down as we described in conjunction with our overall IBP plans. And I would say, just as a reminder of the Satcom costs overall came in well below budget, as I highlighted in the prepared remarks. For the fourth quarter the dollar amount increased as expected for that period of time, they're -- they're kind of -- there is some lumpiness in the timing of those increases in Satcom; so that's what was reflected primarily in the fourth quarter.

I'll follow on with one point on the Asian traffic. We saw the impact there early on with the Hong Kong protests last year, and some of that lingered into early this year. the Japanese traveled down a lot starting the last week of February, and early March, like down 50% inside -- this is probably within Japan. Interestingly, now they are starting to open up travel within China. They -- if you can believe the statistics from China, they've done -- you know, the number of new cases is down, way, way, way down, and the number of deaths is way, way down. And so we are hearing rumor actually that they are starting to fly again in China. So, it might be a little sprig of green hope that travel markets can rebound.

Great. Thanks so much. Nice job.

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

Thank you. This is Landon Park on for Simon. A couple of questions for us. Can you run through maybe on the revenue side on CA, what is your fixed versus subscription revenue or fixed versus variable revenue on that front? And as well on the cost side, maybe can you size your fixed versus including how much contracted Satcom costs you have for 2020? And then, just lastly on Delta, is your base case assumption at this point that you will begin to lose your sole provider status with them? And to your knowledge, are you still in the running for the A321neo org [ph]?

Okay, that's a lot of questions, Landon. Let me start with the beginning which was the breakdown -- about 25% of our revenues, our monthly service pass and about 75% are in air purchases, the data I shared earlier were around the -- in air purchases. We have not seen a drop-off amongst the service passes yet but those do churn and we could see a drop in that if travel is impacted for a long period of time and people don't see any value in having those passes. So, I don't think we can take some comfort in that -- some of that will persist but we could see drop-off in that as well. And we're planning -- and that's in our planning right now. Second question, I believe was variable versus fixed costs. You know, our biggest counterparties are obviously airlines and satellite companies. And the -- one can look at the satellite contracts and think they're fixed, but they also can be renegotiated. And we have -- we've identified 15 levers of cost control that we're working here, group of counterparties [ph] is one of them. We are very valuable customer to the satellite companies, we are the largest customer for a few of them, we are the fastest growing customer prior to coronavirus, and we will be the largest customer and the fastest growing after coronavirus passes; so there is a lot of benefit for them to work with us to help us get through this pandemic. On the airline side too, we have a lot of subsidized equipment deals and other things and we will be going back to airlines and asking for ways to restructure our contracts. And you might say, well, why would they do that? Well, like I said in my comments,…

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

Well, I mean, right now we're planning to be lined fit on A321 when the first one rolls off in Airbus.

Okay. And on the Satcom cost?

Thanks, Landon. Satcom cost; I mean, we don't -- I don't know sure if we've put out the exact number, we do put out the commitments in the K or in the proxy. But they -- you know, as a percentage of what we expect, we expect our spends -- we're managing that very carefully right now. So commitments and actual are probably right about the same moment.

Yes. And there are also some contracts expiring during the course of the year, so as Oak described, we've seen very substantial reductions in price when we renew those contracts. So we'll certainly be having those conversations with the satellite providers, but the number that are expiring and up for renewal or new order are 10% to 15% during the course of this year, and then that comes down very substantially as Oak described over the next three years that the number of commitments that you'll see in the K is $141 million.

Great, I really appreciate that Barry.

Thanks, Landon.

Thank you. And our next question comes from Lance Vitanza of Cowen Your line is now open.

Hi, guys, thanks for taking the questions. I'm trying to get the relationship between declines in commercial airline traffic, and what we should expect in terms of your declines in commercial airline service revenue. So, I appreciate the answer that you gave a second ago about the 25% monthly passes versus 75% in air purchases, but I want to try to come at it a little bit of a different way. First, I guess can you tell us what the percent of revenues that are coming from airline directed versus turnkey contracts? And then, really within each of those or in -- and perhaps it's only in the airline directed contracts; what if any percent of your service revenues are being paid by the airlines, sort of as flat fees irrespective of flights, passenger load, passenger data usage, etcetera? Or is the answer to that virtually 100% of your service revenues are going to vary directly with airline passenger traffic?

Let me cut out, come at your question, first at kind of a macro level, and kind of what is the impact overall to us and how much of that flows through. So we are doing a lot of scenario planning on this, as you would imagine, and I'm going to give you a couple of book-ends [ph] here. So for example, one of the scenarios that we're planning is, if you look at Asia traffic being down by about 60% and you look at the rest of the world being down by about 25%; so that includes [indiscernible] Canada, Europe. For the rest of the year, so for the full year, those very significant percentage declines; so that creates about a $70 million kind of hole on the cash front. Alternatively, if there were no revenue from CA for three to four months, it's similar $70 million hole. So we have identified opportunities for cash savings, that as I've mentioned, we have the 16 levers that we've already identified the pool, those amount to more than $50 million. As you all said, those -- some of those require negotiations with counterparties; so we want to be clear about that but we are very actively managing our way through that. Importantly, also, we have the cash of -- increased from the end of the year to yesterday now at $204 million, and we have the ABL of $30 million, it's undrawn. So that's the way we're thinking about it. More specifically, on your question about in the short run, how much of that revenue decline flows through to EBITDA; you know, it's a very high percentage in the short-term because of the relative fixed costs of that satellite spend. But having said that, those are some of the conversations that we want to be able to have is to help overtime have the discussions with our partners to ensure that we're all kind of sharing the pain here.

And like Barry said, that's one scenario we're also -- I mean, developing plans for more draconian [ph] scenarios if they should emerge.

Well, that's really helpful guys. The $70 million is the cash shortfall, is that versus your previous model? Or when you say $70 million hole; do you mean that is -- that would be -- without doing something that you would be $70 million below the minimum amount of cash that you need to run the business? I'm just not sure what you meant when you said $70 million hole?

It's a relative to current plans, basically.

Okay, great. Got it. So then, and then just again, I mean, I -- I'm not sure, I mean we can follow-up offline if necessary, but really what I'm trying to get at on the -- on my question about the flat versus variable revenues, right; it's not the flow through to EBITDA but just -- if just to take it to it's logical extreme, right. So if you had an airline customer that had zero flights in the quarter, would that airline customer pay Gogo zero dollars or would there be some monthly amount that would get paid just because you're still standing ready to provide service?

We have monthly revenue guarantees in some of our contracts, but not a lot. And where in more and more in recent contracts we have been negotiating monthly revenue guarantees. We do have one relatively new contract, which is a flat fee CIR contract. But you know, a lot of the revenue we get, it does depend on in-flight connectivity sessions or use of our Gogo vision product or free messaging usage etcetera. We do get -- we have some of our free messaging, it is on a per passenger reported basis; again, that's not a huge amount.

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

Yes, it's not like the American Airlines situation; and that -- the American Airlines contract was a lot different from the Delta contract. And so -- and it was -- frankly, close to the end of the contract, as well as the fact that we didn't have really a mature satellite product at that point. And now we've got 2Ku and I think the 2Ku is as good or better than any other IFC product in the world right now. So that -- the situation is a lot different than American. Well, I'm not going to comment on what Delta's plans are; I will say this applies to the domestic fleet. We -- I mean related to Delta, we've been talking about airplanes, they have not -- right now, frankly, nothing is decided. So I would be making things up if I gave you an answer, and I don't want to do that.

No, that's helpful. Thanks guys, very much. I appreciate it.

Thank you. And our next question comes from Philip Cusick of JP Morgan. Your line is now open.

Hey, guys, thanks. Oak, can you talk more about industry consolidation? And are you considering selling parts of your business as well as buying or merging with other things? Thanks.

Yes. I mean, I would say everything's kind of on the table because these are dynamic times and industry needs to see some consolidation and there's a lot of conversations taking place between different players in the ecosystem. Some people are looking at more vertical integration plays, some people are looking at more horizontal integration plays; so we do think that CA business does need to see some consolidation. And we think that Gogo by virtue of our market share, by virtue of our really strong distribution, product roadmap, engineering systems integration capabilities, etcetera is a very important component of the industry and it would be of a lot of value to somebody who really wants to be a big player in the industry. So, that's how we look at it. I think there is -- you know, I don't want to mislead people into thinking that there is anything imminent going on, but there is a lot of conversation taking place.

Okay, thanks. And then second, on the $125 million to $140 million, there was a $120 million to $145 million that you would have guided to. Is that a clean comp versus the $115 million in 2019. What are the puts and takes there? Thanks.

Yes, Philip, it is a clean comp in the sense that it does not include recurring revenue; so that benefit that we saw in 2019 is excluded. So of course that takes the $146 million from 2019 down to the $115 million. So the $120 million to $145 million is what we would have guided to just as of -- on the straight out basis coming into the year.

Okay, thanks.

Thank you. And ladies and gentlemen, this doesn't include our question-and-answer session. I would now like to turn the call back over to Oakleigh Thorne for any closing remarks.

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

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