Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2020 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, to Mr. Will Davis, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Dillon, and good morning, everyone. Welcome to go Gogo’s first quarter 2020 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 May 11, 2020. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During the call, we’ll present both GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings press release. This call is being broadcast on the internet and available on the Investor Relations section of the Gogo website, at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we’ll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks, Will. Good morning, everyone. I’m not going to spend a lot of time on Q1 2020 as people are far more focused on our response to COVID-19 than they are on the quarter. But I am going to steal a little of Charles Dickens to put the quarter in perspective, and that is that Q1 was definitely a tale of two quarters. It was the best of times in January and February, and close to the worst of times in March. I would say this close to the worst of times because only April was worse. We finished February ahead on service revenue, gross profit, EBITDA and free cash flow. And while we managed to still exceed our EBITDA and free cash flow targets for the quarter, we finished behind plan on service revenue, equipment revenue and gross profit. I’m going to leave most of the numbers to Barry but share few that demonstrate the drop-off in our March business. In our CA North American segment, service revenue averaged $28 million per month in January in February, then fell 35% to $18 million in March. ARPA fell 36% from January and February to March and gross passenger opportunity fell 18%. In our CA Rest of World segment, aircraft online grew 30% over the prior year for the quarter. But despite that, gross passenger opportunity fell 25% in March. And in our Business Aviation segment, daily flights dropped 27% from the month of January and February, to the month of March. The drumbeat of week-over-week steady declines began in Asia in late February, and by mid-March was in full effect in the U.S. and rest of the world, and carried through April. Only now in May do we see some green shoots with a big increase in BA flights per…

Given these extraordinary times, we thought [Technical Difficulty] quarterly comments to begin with the questions on the top of everyone’s mind. I’ll start with the financial impact of the COVID-19 pandemic on our business, then, move to a discussion of the financial implications of our scenario planning, and I’ll conclude with an abbreviated review of our operating results. Some important context for determining Gogo’s ability to weather the COVID crisis is understanding our financial position coming into it. Over the course of the previous year, Gogo had strengthened in two important ways. First, the business was finding its financial and operational footing; and secondly, we were in a much stronger cash position than anticipated. As Oak described, the first quarter results represent a tale of two quarters. Through February, consolidated adjusted EBITDA was $13.3 million ahead of our internal budget and consolidated service revenue was also running ahead of plan. Driven by the strength of the first two months, consolidated adjusted EBITDA of $25.7 million, the full first quarter, slightly beat our internal budget. This was in spite of the dramatic impact of the coronavirus pandemic during the third month of the quarter. We believe the operational and financial discipline underlying these results provides an important foundation to build on, once things begin to normalize. Even more important than this operational foundation is the Company’s strong liquidity position exiting 2019 and continuing through the first months of this year. You’ll recall that we significantly overachieved our free cash flow objective last year as we improved free cash flow by $163 million in 2019 versus the at least a $100 improvement we had targeted going into the year. This was the result of lower investment in airborne equipment, adjusted EBITDA coming in well ahead of plan during 2019 and improvements in…

Thank you. [Operator Instructions] I show our first question comes from the line of Philip Cusick from JP Morgan. Please go ahead.

Hi. Thank you. Oak, we’ve been talking about M&A in the space since you came back as CEO and for a long time before. Does this crisis create an urgency for strategic decisions? And do vertical or horizontal seem more viable today?

Yes. I think, people’s revenues are down in the IFC space. And I think that accentuates the issue of scale. And I think, it makes it of late, [ph] bear the fact that nobody has scaled horizontally. Vertically, people are also obviously taking a hit on the reduction in IFC spending, people like us and other service providers coming to satellite companies and looking to sharing the pain, if you will. That remains an attractive market for both, satellite operators and service companies in the long term. And, I think that the opportunities created by combining in terms of scale are highlighted by the fact that your revenues are down. You combine, you got more revenue, and you combine cost structure, makes a lot of sense. So, I think, if anything, it accentuates it. I wouldn’t want to speculate, whether vertical or horizontal more likely. I think, there’s a lot of industrial logic for either to be honest. And, obviously, I think there’s a lot of conversations taking place right now. And, I think it will come out in the wash in terms of what makes the most economic sense to the boards of various companies involved.

So, just to push back a little bit. And the satellite ecosystem is beaten up, there’s not a lot of equity value there. The IFC space is beaten up. I can’t imagine that a lot of airline suppliers are feeling great right now. How do you actually get anything done here, or just somebody has to come in with new capital to roll the space up?

First of all, our valuations are relative. So, if you’re looking at stock merger opportunities, that type of thing, and everybody’s stock is beaten down, that helps to some extent And it also, frankly, in our case, I think the public markets don’t really understand the value of the company, and I think strategics do. So, I think that there’s just a dislocation there. And hopefully we would look for some adjustment, and that dislocation is part of the deal.

Okay. And one more, if I can. Any update you can give us on the satellite deals you said at or close to a -- to signing something new. What kind of pricing could you see out of that? And then, also, are you concerned about availability over time? Are there any changes in construction or lunchtime in coming?

I would say this, in terms of structural price reductions long-term, we see that coming as new launches take place. And obviously, we’re still talking to our various providers about their launch plans. And most launch plans appear to be sort of on track or delayed by months not years. In terms of the breaks we’re getting, it’s a sharing in the pain. So, it’s kind of what we’re getting from the satellite companies is, look, okay, well if your revenues are down here, we’ll share in that pain here. But that’s not going to -- those deals won’t be long term. If we recover, they’re going to go back to the pricing they were getting from us before COVID. So, I would say, there’s really two things to think about. One is, helping Gogo get through this period when demand is way down. And that’s not long-term structural, I don’t think. And then, on the other side, what is structural is that as new satellites go up, pricing is coming down dramatically. I think, in the last call, I talked about the number of contracts we have up in our rest of world segment over the next three years. And it’s something like 60% or something like that. And all of those are rolling over, and they’re going to be in much cheaper satellites going forward. And that’s, I think, more where the more the structural pricing change takes place that will improve our economics on the long term.

Our next question comes from Ric Prentiss from Raymond James. Please go ahead.

Good morning. First, I hope you, your families, employees, friends all say okay during this crazy time, going a lot through it. I wanted to circle on some of Phil’s comments then. You mentioned the salary contracts would not last a long time to help you through the period. How should we think about when do you know are you headed towards the best case? When do you know you’re headed towards the worst case? What are kind of the intermediate steps that kind of let you know which path we’re on?

It’s all frankly tied to flights, load factors, would be the two biggest drivers. We actually -- we don’t stay locked into our best and worst either because circumstances have changed a lot. I mean, if one stayed locked in, but one what I thought was the worst case eight weeks ago would look like a very rosy case today. We consistently are reviving and trying to develop new scenarios that might be worse than worst case, et cetera, et cetera. So, we have to stay flexible in that regard. Kind of the structure for how we go about planning and the 16 levers remain consistent across all those scenarios. But, we just obviously pull them to different levels, depending on the scenario. So, that’s the big thing, return of passenger traffic and the things that will drive that. We see very high take rates during the crisis, but there haven’t been many passengers. So, it’s not very needful. If we can hold on to -- probably won’t hold on to the -- as high as the case rates are today because of the fact that -- flight attendants, for instance, were all online and they are not -- you’re not going to increase the number of flight attendants on flights as flights come back. But, if we -- if more people were using flight connectivity when they come back because they’re more used to being connected, they’ve been working online from home now, everybody is connected at this point, it seems. I think that people are going to want to be connected when they fly. So, we expect the take rates to be up. And if passenger traffic comes up, we think that’ll be the key trigger for us in terms of understanding how much we have to cut and when.

Sure. And obviously, a lot of moving pieces here on the satellite cost, the furloughed employees and compensation reduction. Any thought about providing quarterly guidance, given how many moving pieces there are but not much clarity on the full year?

Yes. I think, we thought about it for this quarter, and there are just still too many moving parts. I mean, some of the green shoots I talked about in my script, literally appeared last week. So, things are happening and change -- the situation is changing. It’s very dynamic. As soon as we sort of think we’ve got clear path view of what’s going to happen, I think we’ll go back to giving quarterly guidance first, and then probably back to annual at some point.

Okay. And you gave a little bit of color on April. Any thoughts about how we should think of overall revenues or EBITDA performance in April, if that does prove to be mid-April was kind of a low point maybe?

Yes. You can pretty much nail the low point at April 12th. That was the lowest day for our business aviation flights. And I think that was the lowest day for passenger count on our airlines. In terms of guidance around that stuff, I’m going to turn it to Barry, because he does the numbers.

Well, Ric, as you know, it’s just very difficult to predict at this point. So, I think we would just be getting probably too far over our skis to offer too much about that. But to your question about quarterly guidance, I think as the situation does stabilize, which we hope to see beginning to happen in this quarter, it may make sense for us to provide quarterly guidance. And I would just underscore the point Oak made about this being a great dynamic planning process. And we are continuing to look to scenarios real time as the information comes in. So, I think that finds its footing and as if we begin to have some better view of the future and we may be able to give some guidance, in the short term and out over time. The BA business I would just comment is under the same general -- out of COVID, obviously, but not nearly the same effect and also the drivers of that coming out, we think are going to happen more quickly. So, I think we also monitor the differences in those very carefully. And so, as we look forward to what BA and CA look like, over time, we may be able to think about those differently too.

Great, thank you.

Yes. I think we -- yes, well, I think we aim people to say that -- we thought April revenue was down 60%, 80% in our CA business. And it’s coming back up a bit, Ric, now. But, it’s hard to tell, how fast that’ll come back. BA on the other hand, we talked about the suspensions, those obviously will hurt revenue. In April, we’ve already had a pretty big comeback in terms of the number of suspensions being reactivated. The suspension normally is somebody goes in for maintenance and they want to turn the service off for a month, and we let them do that. That usually runs like 40 a month, while of a sudden we had 900 something in the March-April timeframe, 200 of which have come back mostly in the last week. So, it’s very hard to predict if that rate continues in terms of reinstatements. April could be impacted but May pick up pretty good, and June could be back to normal. But, it’s hard to predict that that pace of reinstatements will continue or not.

Makes sense. Thanks, guys. And good luck as we make it through this.

Thank you.

Thank you. Our next question comes from Lance Vitanza from Cowen. Please go ahead.

Hi, guys. Thanks for taking the questions. I wanted to focus on liquidity, a few questions there. First, maybe just an easy one. The $20 million, I think you called out a $20 million increase in cash pro forma for having drawn the revolver from the end of 2019. Was that through March 30th, or was that through today’s date?

That was really through April, Lance. So, that cash build went from $170 million to the $211 million at the end of April. As I mentioned, we have the payments for our interest that are in May. So, the first of those for $35-plus-million was made on May 1st, and then the payment for the convert interest is also made. So, the point we were trying to make was that the cash is significantly improved during last year and since the end of last year in part due to the ABL, but also because of operations.

That’s great. Okay. So, you’ve said in the past I think that you consider from $100 million as your minimum liquidity threshold. I’m wondering if that’s still the case or if that has become a smaller number in response to changes that you may have made. And presumably, whatever your threshold is, the thresholds lower the day after you make your bond coupon? Is that fair?

Yes, let me just clarify one thing you said there, Lance, which is, we didn’t really do the minimum threshold for liquidity as $100 million. Previously, what we had said is our projections may change liquidity above $100 million. We can operate with meaningfully less than that. And to your point, the minimum amount and the requirement will fluctuate based on the timing of the interest payments. Also, expense levels change as we implement some of these cost levers. But, in general, we think about targeting at least in the order of about $50 million or so for operating liquidity. And of course, this includes making our interest payments is after the interest payments. So, that has been the zone that we have targeted as we go through these planning exercises.

Great. Okay. So, then, I think, Barry, actually, you called out, I believe it was $40 million of call it net cash savings that I believe was related to slowing the pace of the 2Ku installs. Did that $40 million include equipment revenue associated with the installs as well, sort of like the all-in kind of number?

Yes. So, the actual slowdown in purchases will be at least $80 million. And those are the deals that we’ve already negotiated with our supplier channel. And then, that $80 million number gets offset by the forgone proceeds from airlines that we would have received. So, you’re right. The net amount was $40 million, and that’s just the amount for 2020. So, just to clarify that. So, the savings amounts, Oak and I both quoted in aggregate were for ‘20 and ‘21. So that $40 million really comes this year, which is important.

Got it, understood. What about satellite capacity? Can you -- and obviously that’s as a big bucket. Can you range that for us in terms of best case, worst case scenarios?

Well, I mean, as you know, it’s a single line item, largest line item cost. And our philosophy or our strategy going in is to sharing the pain. So, we’re really asking the satcoms to reduce cost commensurate with the reduction in capacity. We need to satisfy demand, so. But that number -- it’s in the tens of millions of dollars also for this year as we look to what we think is an appropriate amount. And so, it’s a very substantial number. I wouldn’t want to get too far over that because we’re still in these conversations. But, I think what we’ve been very pleased with the benefit that we’ve received so far and I think the satellite companies have been cooperative. And I would just say that the numbers that we are seeing from those we have come to terms with are at or -- they are at the numbers that we have modeled.

What about the 5G rollout? Could you repeat what you said about the cadence of spending 2020 versus 2021 and how that might be deferred?

Yes. So, the total amount of spending for that program is about a $100 million, of which two thirds is CapEx and the balance OpEx. So, we think about this in terms of the development costs associated with really developing the technology and then the rollout of the Gogo 5G, as we deploy the cell site. So, $50 million of that is spent in 2021. So, that’s the peak year of spending. So, in the likely case scenario, there’s really very little delayed, but we could certainly delay that program. We would think about it in those two parts is, in the ideal, we would maintain the development. And so, we have the technology deployable and then we can easily then vary the deployment of the cell site. So, you don’t have to have, of course, nearly all the cell sites in order to get the Gogo 5G experience. They can be deployed in part and then you layer in the additional cell site deployment as required to service the capacity needs. So, that’s something that we could do. And it saves meaningful amounts of cash of that $50 million really in 2020.

Last one for me is on the CARES Act with respect to the $150 million loan application. Your first lien note indenture, I don’t think permits incremental debt of any kind at the guarantor level, whether it’s secured or otherwise. So, if the application -- well first of all, maybe I’m misreading that. But, if the application is approved, would you expect to just ask note holders for a waiver or am I misreading the covenants?

Well, first of all, we’ll have to see if we receive that money, how it’s structured. So, is it at the HoldCo level or at the OpCo level? I think that if the debt restructured up at the HoldCo level, so it structure is subordinated to the first lien debt, obviously the first lien holders would be more available to that. But, I think the other part about this is that by bringing in this additional buffer liquidity or helpful liquidity, we could have a very constructive conversation with our holders around that.

[Operator Instructions] I show our next question comes from Louie DiPalma from William Blair. Please go ahead.

Hey Louie.

Barry and Will, good morning.

Good morning.

I hope you guys are doing okay during these difficult times. Oak, on the subject of potential industry consolidation, three of the potential horizontal consolidators use Ka-band. Can you provide any more color on your comments regarding the optionality of being able to potentially migrate 2Ku system to Ka or 2Ka?

Yes. So, we’ve worked with our supplier our way to essentially pull out the disks from the top of the aircraft with the fit inside the antenna terminal structure, fill out the Ku disks replace them with Ka disks. And then there are a couple LRU boxes inside the aircraft that would need to be swapped out as well. But, it doesn’t require any real change to the structure of the aircraft. You’re not taking the antenna superstructure off. That all stays the same, the adapter plate, and fairings and how that the whole structure is attached to the aircraft. So, it’s a pretty easy conversion for those who want to go from Ku to Ka. So, that’s a new development on our part and one we think gives us A, a lot of flexibility with our -- in terms of spectrum use in the future, if for some reason Ka ends up being a preferred band -- or preferred spectrum by our customers and also in business combination context, gives us a lot of flexibility.

Thanks, Oak, and one last one for me. And this is probably for Barry. Barry, if we assume that April represents the bottom, can you estimate roughly, like how much consolidated revenue was down in April, in terms of a ballpark percentage?

Well, that was the amount for CA, Louie. So, I think probably the easiest way to do that is you can look at what the normalized revenue was for the first couple of months of this year -- January, February, and that decline that we said was on the order of 60% to 80% would be reflected in those April numbers. I wouldn’t want to do that math off the top of my head, but that would be basically the foundation for doing that calculation.

On the CA side…

Yes. That’s just CA, as I mentioned. Yes.

Okay. So, when taking into account, if we assume, like flattish, BA, should like we expect a 50% year-over-year decline in total consolidated revenue, or give a ballpark for what we should expect for, like the trough year-over-year decline?

It’s going to be -- go ahead, Oak.

Yes. Well, the one thing I want to remind you, Louie is that these account suspensions and planned downgrades will have an impact on BA revenue. We don’t have revenue for April yet, but, that’ll be down. And if you think about the ATG part of our business and just the numbers I shared with you with percentages, you’re going to get something close.

Got you. And are there -- I know that you’ve spoken a lot or you’ve mentioned one of the international customers, not being able to pay or credit rate down. What are your expectations for potential credit losses on the business jet side for the rest of the year?

We don’t expect to see meaningful credit losses there. The way the subscription business works is over 90% of the of the BA service revenues are from subscription businesses. So, those payments are largely made on credit cards. And so, we have just seen very, very little losses historically in that case. And then, there are some of the larger fleet operators, for example, in BA that are under larger -- that are under contracts. And as we talked about, I think that people are going to want to be using the business jets, particularly as we come out of the coronavirus situation. So, we really don’t expect to see meaningful credit losses there. The exposure is on the CA side. And so, as we mentioned, that was from one international airline partner that went into administration there that we could see more losses, credit reserves taken for on the CA side as we go forward, if the situation deteriorates. There’s -- the new standard now, as you know, requires you to assess the situation and to take those losses currently as opposed to waiting until they happen. So, it’s based on the assessment. So, as we do that assessment now quarterly, could be that we would see that those charges taken. And just to clarify, in the CA business those charges are both for current receivable balances as well as against contra asset accounts that sits on the books. So, not all of it is a write down and current receivables, but part of it is a write down of basically the value that contract over time.

That makes sense. Thank you, Barry. And thanks, everybody.

Yes.

Thank you. This concludes our Q&A session. At this time, I’d like to turn the call back over to Mr. Oakleigh Thorne, President and CEO of Gogo, for closing remarks.

Thanks all for attending our Q1 2020 earnings call. I’d like to finish with a quick summary if I could. First of all, in-flight connectivity is not going away because of the corona crisis. If anything, we think passenger adoption will accelerate as more people are connecting online during this pandemic and that they’ll want to stay connected once in flight when pandemic is over. Second, we have a three-track plan to ensure our long-term solvency and drive value for our shareholders. The first track is our operating plan. We constantly adjust scenarios and develop action plans along our 16 cost levers to hit our objectives. Those objectives being to maintain the minimum liquidity we need to safely operate the Company, to pay the interest due and our debt, and to preserve the strategic franchise value of our two businesses. We’ve identified and are implementing $170 million to $330 million of cost savings to achieve those objectives and are well on our way to doing just that. Second track is our strategic track. We believe our Business Aviation division is a very attractive business that can stand on its own. And we believe our Commercial Aviation business is the leading service provider to the commercial aviation industry. And we believe it could bring tremendous value in a vertically or horizontally integrated business combination. Finally, we have a financing track, should the first two tracks fail. We’re not currently pursuing financing. However, we’re keeping our eyes open for appropriate opportunities as they arise. We’ve applied to the federal government under the CARES Act for grants earmarked for the airline industry and airline contractors. And if we receive government assistance, we would reinstate employees that have been furloughed and restore salaries that were reduced last week. I want to thank you for your attention and we look forward to speaking to you again in the future. And as usual, stay safe. Thank you.

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