Ladies and gentlemen, thank you for standing by. And welcome to the Q2 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.

Thank you, Jimmy, and good morning, everyone. Welcome to go Gogo’s second 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 August 10, 2020. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we’ll present both GAAP and non-GAAP financial measures. We’ve included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our second 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 and welcome to our Q2 2020 earnings call. And it certainly was an extraordinary quarter, but for all the wrong reasons. I think I can sum it up by saying that if you sell internet on airplanes and no one's on the plane, it's tough to [make a list], anyhow. Our consolidated revenue was down 55% from prior year. And despite very significant cost reductions, our EBITDA fell into negative territory for the first time since Q4 2013. The only positive metric was that we eked out a $1 million profit and unlevered free cash flow for the quarter. That said, there are green shoots starting to emerge. We're seeing a really solid bounce back in our business aviation division, and a slower recovery, but a recovery nonetheless in our commercial aviation business. Our commercial aviation gross passenger opportunity numbers really tell the story what we call GPO. In pre-COVID times, we were averaging 37 million passengers a month on Gogo equipped aircraft. In April, that plummeted to 1.9 million passengers, down 95%. It recovered to 3.9 million in May, 7.1 million in June, and that we don't have final GPO numbers for July, we've continued to see steady increase in flights, load factors, and user sessions in July and August, and I'll get into those a little more detail in a moment. Through all this turbulence, we remain laser focused on our liquidity and on driving shareholder value. And as I outlined on our last earnings call, we've developed a three track plan of attack as we call our value creation plan. The first track is a COVID operating plan focused on preserving our liquidity through the end of the pandemic. The second track is a strategic initiative to combine our commercial aviation division strengths,…

Thanks Oakleigh. I'll start my comments with a summary of the financial impact of the COVID pandemic on our business, as well as our response. I'll conclude with an overview of the operational results for our BA and CA divisions. Of course, Gogo has been significantly impacted by COVID-19. Commercial Aviation has been much harder hit than Business Aviation, and VA is already recovering reasonably well. Consolidated revenue was down by 48% from the first quarter of this year. CA revenue declined nearly three times as much as BA, as CA revenue was down 63%, and BA declined 23% over the first quarter. The cost controls we have already implemented this year are running ahead of plan. As a result of these actions, we achieved breakeven unlevered free cash flow for the quarter and we ended the quarter with $156 million in cash. Let me build on Oak’s comments by summarizing the financial dimensions of our response to COVID. As Oak described, as we outlined on our last earnings call, we are executing on a three-part value creation plan, including the operational track, a strategic track, and a financing track. Oak covered the strategic and financial tracks, so I will focus on the financial implications of our operational planning. Within the operational track, we continue to follow our three-part planning and execution process, developing scenarios, identifying cost saving levers, and thirdly, actively monitoring the industry dynamics to assess where we are on the continuum of the scenarios. On our last quarter call, we reported that we had identified cost savings that are ranging from $170 million to $330 million through 2021. We also indicated that the level to which we executed on these plans will depend on how the COVID-19 impact unfolded, relative to our best case and worst case…

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

Hey, good morning. Thanks for taking my question. Oak and Barry, thanks for the detail, very helpful. I appreciate the execution you guys have had in a very, very difficult environment. Maybe first, just in terms of the strategic process, I was wondering if a joint venture outcome is something that's amenable and something that's actually on the table and you mentioned separating the balance sheets as well. I was wondering if you could provide any color on that front in terms of the debt levels or if any debt level that would assume to be going with the CA side. And then, I had a follow up on CA & BA.

Yes. I mean, we're not going to comment, Scott, on the potential forms of combinations this time. Like I said, we're not going to answer further questions on that. In terms of the debt, though that stays at, you know, [RemainCo] at the parent level, that would not be going to CA.

Got you. And just a follow up on the CA North American gross margins front, a lot better than I think people were expecting. It sounds like you've been very successful in terms of your renegotiation with your satcom providers, but could you dig in a little bit more in detail in terms of what maybe the fixed or variable component is? If there were any one-time benefits in there, or is this kind of a base case minimum of what we should expect in gross margins going forward given really a difficult topline environment in the second quarter?

Barry?

Yes, Scott. Let me take that one. You know the kinds of cost reductions that we have seen are clearly part of our plan and that we will see the benefit of those going forward, you know, particularly as we converted those furloughs to reductions in force, we will see that benefit going forward. So – and that applies across the CA North America and Rest of World segment. We did see, as I mentioned, negative impact on G&A in ROW segment from the CECL reserves, but in general, we expect to see the two benefits continue to go forward, so the benefit of reducing our absolute level of operating expenses, as well as seeing the benefit from their reductions in the satcom cost. As I mentioned, these satcom cost reductions that we have been able to negotiate in partnership with the providers are generally reviewed on a rolling basis. So, you know, they don't want to get too far out over their skis until they see how the COVID crisis is going to unfold, but they have been very partnership like with us. And so, you know, we expect that to continue in the month and the next several quarters.

Great. And lastly, just quickly on BA, you gave a lot of color there. It sounds like from reactivations, reopening of plans that you're kind of getting back into 90% plus kind of run rate of where BA had been on the services front, but surprised to see as well you're continuing to see new aircraft coming online. I'm wondering are you seeing demand out there for new aircraft ramping up. Or is this execution against the existing backlog that had kind of been building up with ADSP and I'm kind of wondering how that longer-term pipeline is looking. Thanks so much.

Yes, I mean order flow is way down. Like I said, we shipped 100 in Q2 versus an average of, I think, about 270 a quarter last year and we don't expect to get back up to that 270 levels this year, but we do think we'll have, you know, higher levels of orders in – or shipments rather in Q3 and Q4. So, and I think that, you know, [things kind of] froze in Q2, especially, you know, in the April – you know, actually March, April, so Q1, late Q1, Q2, early Q2 timeframe, you know, people froze orders. They are starting to open up a little bit, so we do see – you know, we do see new installs. We don't see the level, like I said, of last year, we do see a lot of interest in [indiscernible] of our demand for charter and we've not – but, you know, we haven't seen that flow through yet as new orders in [NA areas] as I said my script.

Great, thank you.

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

Hi, guys, thanks for taking the questions. I just have two, if I could. I know you talked a little bit about this on the prepared remarks, but obviously a great job on cash flow in the second quarter, but to what extent do we expect the benefits there to perhaps reverse in Q3 or Q4? And then, I guess to the extent that you don't expect any reversal in the back half of the year, to what extent would you expect it as the business ultimately recovers? In other words, are you going to have to start making good on either deferrals for – you know, for broadband capacity NOIs?

[Indiscernible]

Yes, Lance, let me – go ahead.

Yes, sorry, Barry. I mean, we – just to be clear, our plans run through – when we talk about our short-term kind of COVID operating plan, that runs through the end of 2021 and I think I gave in the call, you know, our expectations for the recovery of air traffic by then. And so, you know, we don't have – we're trying to push if we’re deferring anything at all, it’s out past the end of the pandemic, that's the punch line of what I was going to say. Barry, do you want to fill in a little more detail?

Yes. On your question about kind of the near term and then the longer-term cash flow [adds], you know, we do – we have really enjoyed the benefit in the first part of this year from the expense reductions and also working capital management. So, the working capital management, you can't expect that to continue. So, we would expect the – you know the unlevered free cash flow to, you know, not be at this breakeven level for the balance of the year. We expect that to be negative for the rest of the year, but when I look at the 2021, as we talked about, you see the benefit of these cost actions we’re implementing this year take hold and get the full-year benefit next year. That's why we see, you know, moving then into, you know, meaningfully positive unlevered free cash flow in 2021 and approaching breakeven free cash flow, including the payment of our interest expense in 2021. So, it's really the combination of some uptick in the – on the revenue side of the house, and then the ongoing benefit and the full-year benefit of the cost savings actions that we're taking this year.

Okay. And in your prepared remarks, you mentioned the 6% converts to May of 2022. I suppose [indiscernible] you'll have them refinanced by May of 2021 so they wouldn't go current, but if I remember correctly, the old convertible notes went current for a period of time and the world didn't end. So, given the trajectory of the recovery that you're seeing to-date, I would imagine, you know, this is a situation in which you would want to wait as long as possible to refinance those notes, no?

Well, I mean I think it's really important to point out that the value creation plan that we've described with the three tracks creates a lot of optionality to address the converts. You know, the strategic track, you know, successful CA sales process is one example of the ways that value creation process could contribute to this optionality. The operations track and the cost savings resulting from that put us in a stronger liquidity position and probably adds to our optionality in making the business more financeable. But our objective is generally to address the converts before they go current in May of 2021. But as you point out, it's not a completely great line and, you know, the last convert went current for two months so – and then we're able to, you know, very successfully refinance that and the whole balance sheet at that point in time. So, that's our general thought process and the objective, but as you point out, it's not a complete bright line with them going current.

Okay, thanks guys.

Thank you. And our next question comes from Louie DiPalma with William Blair. Your line is now open.

Oak, Barry, and Will good morning.

Good morning, Louie. How you doing?

Hi, Louie.

Doing okay. When taking into account the splitting of the CA division with the BA division, do you have a high level sense on what the cash burn for the CA division was in 2019?

Barry?

Yes. On an unlevered basis, the cash burn for CA 2019 for the full – all of CA was about $24 million.

Sounds good. Yes, that's what I was looking for as, you know, you guys are looking to sell this, you know, division, whoever acquires it would probably also take into account the cash burn. So, I was wondering what the all-in cost for that would be. And secondly, also related to the CA division, SpaceX has been aggressively launching satellites and investing in what seems to be Ku band satellite Internet. And previously you guys touted your 2Ku antenna as having the ability to connect to both GEO and LEO satellites. And you also recently announced that you conducted a trial connecting your 2Ku terminal to OneWeb’s LEO constellation. So, I was wondering is it also possible that the 2Ku system would be compatible with SpaceX’s Starlink as well?

Yes, it would be really. I mean, I think we are well-positioned for any type of non-geostationary satellites because we also have the ability to convert from 2Ku to 2Ka and that will fly under Ka LEOs just as well 2Ku will under Ku LEOs.

Sounds good. And one final one, how much CapEx and general spend remains for the ATG 5G network? You said you spent a little bit this quarter and I think you've spent a little bit in the past as well.

Yes…

Yes, as you may recall, Louie, that took – Oh! Go ahead.

No, go ahead, Barry. Go ahead.

As you can say, the – you know, the total cost of the ATG network is about $100 million, about two thirds of that is CapEx, about a third of that is OpEx. We are keeping the OpEx spend on track. So, the development process itself is very much on track. So we have three major vendors there and, you know, the Cisco core is installed, the antenna prototypes from FIRST RF have been received and the board layout is complete, so that development is very much on track. The major part of the capital spend starts in 2021, as we deploy the towers and that was about $50 million that was projected in 2021. So, we can defer that if for as required. You know, it's largely discretionary. We do think it's important to keep that program on track, but it's also again, not a binary kind of decision because we can roll-out cell sites to deploy that network and then add additional cell sites as required for the capacity, but to get the initial coverage, you obviously don't have to roll-out the full network, so 2021 is the major year of that investment.

Sounds good. Thanks guys for taking my questions.

Thanks, Louie.

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

Thanks. Good morning, guys. I hope you, your family, employees are making it through this crisis safely. Sounds like you're addressing that.

Thanks, Ric.

First question, obviously, you took the time to break out the BA from the CA between the organization and putting ATG at BA last year, if there was a sale of CA, how much revenue would need to be sent from CA to BA since BA is handling all the ATG network? In other words, I don't think there's any limit corporate eliminations right now, but one would assume there'd be some billing from BA to CA for that support.

That's right. There'd be a commercial agreement between the two companies and exactly what that would be is obviously going to be a subject in negotiation between us and the potential partner.

And is that something that you'd wait for the partnership to be in place as opposed to putting a contract in place before them?

No, I think it's a pretty important term for any transaction, Ric. So yes, it would – I think everybody would want that in place before signing a deal.

Okay.

And Ric, as you probably know, there is currently a transfer price mechanism in place that BA charges to CA for the ATG base megabytes that it delivers.

And how much is that [indiscernible]? I don't remember the number right now.

I don't believe we disclose that publicly. We can circle back with you.

Okay. And on the next gen 5G ATG network, when do you have to make a decision on the spending? As you watch the recovery of – hopefully of the different segments out there particularly BA is already recovering, is it that you need the strategic decision made first? Or when does ATG need to get the green light to kind of move into the next spending phase?

That would be, you know, sort of middle of next year, probably, Ric.

So, you've got some…

Yes, we've got time.

Yes.

Okay. And I know you don’t want to talk about the strategic transaction possibilities, but did I hear you say kind of a summer time process in your prepared remarks?

Yes, we had some inbounds early in second quarter and we’ve lost a formal process in the second quarter, which is continuing now in the third.

Okay. And final one for me is on the CARES, it sounded like, based on the frequently asked questions, you might not be eligible for the loan, but you might still be on the grid. When do you expect to get further clarity on that $81 million grant item and then the employee effect would actually occur?

Well, you know, frankly, we haven't formally been told anything on the loan program. We're just gleaning it from a fact that's been posted. You know, we have some discussions going on right now with Treasury and we'll see where they lead. I really couldn't predict, you know, anything Ric, around that. It's just – it's been very unpredictable. So, you know, frankly, I'd just be stabbing in the dark to give you any kind of timeframe. Obviously, it should be before September 30 because for us, September 30 is [indiscernible]. The whole point of these programs is kind of over. So…

Right, right. Okay, well appreciate that extra color. Good luck as we continue making it through these difficult times.

All right, thanks a lot. Right. Thank you.

Thank you.

Thank you. And let's – Jimmy, let's make this our last question.

Understood. Our next question comes from Phil Cusick with J.P. Morgan. Your line is now open.

Hey, guys, thanks. Following up on a couple things. So, if CA was sold, does the investment in 5G make sense at the levels that BA will be using?

Yeah, absolutely. The, you know, people's expectations for the performance of implied connectivity are going to grow as they get better performance in their home or office environments. And so, if you get there's too great a disparity between what they get in flight and what they get out where you're making yourself vulnerable to new competitors coming in or new technology? So, yeah, we think it's important to go through these kind of generational upgrades of the system in performance improvements.

Yeah. And then add to the RJ business, that's going to be the – to the RJ business it’s also going to be an important investment to make as they drive capacity and if the – if and when everyone started to go through as well, and demand [indiscernible].

Okay. And then thinking about a CA deal, you know, we've got Rest of World looks, if not going to grow for the next few years, you just did a pretty substantial layoff. This is all in preparation of doing some kind of deal on making the asset more attractive, or could some of these things be reversed if you, if you did a combination?

The reduction of course is really part of our COVID operating plan and, you know, our – what we need to do to make sure we hit the minimum liquidity requirements we have for the business to get through the pandemic, I would – that is not really related to any kind of strategic transaction. I didn't really follow your question as it pertains to the Rest of World. Yeah, I mean, you said yes, it's going to be losing money for the next couple years, but, where were you going….

I sounded like the planes under contract, wasn't really going to be growing for the next few years either between potential bankruptcies of customers D-installs and a slower install pace, is that right?

No, I think we said there's about 100 of the planes that are flying today are installed the day that may go away. And then we've got about 500 plus in backlog there still. Of those in backlog, you know hundred could be at risk because of the [airlines] that are in bankruptcy. However, that doesn't always mean they don't install in the end. And so that's a risk factor. And even if you lost all those, we netted it out; we'd still be up more than [300 going forward].

Okay. And then last thing, you know assuming the CA was sold or spun out, is BA large enough to remain a public standalone company, or should that be sold or taken private, as well?

We don't have any plans around that right now. I'll say this. I've been CEO of much smaller public companies. You can be a $300 million or $400 million public company. And, you know, obviously we would hope to grow that business also. So, you know no plans around that at this time. So, we'll just see what we – what the world looks like when we get there.

Okay. Thanks, Oak.

Thank you.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Oakleigh Thorne, for any closing remarks.

Thank you very much. So, thank you very much for attending our Q2 earnings call. I'd like to finish by summarizing a few key points. First of all, in-flight connectivity is not going away because of the corona crisis. If anything, we think passenger adoption will accelerate in the future as more airlines offer free service and as the pandemic drives more people to be connected and stay connected. Second, the Business Aviation market is recovering quickly and the Commercial Aviation market is recovering, though at a slower pace. Third, based on relatively conservative traffic assumptions, we are on track with the cost reductions we think we need to make to survive this pandemic. And fourth, as we've discussed, we have a formal process underway to combine a Commercial Aviation Division into a larger enterprise. Now, we can't be sure we’ll complete that transaction. We're pleased with that progress to date. Thank you for your attention, and we look forward to speaking with you again in the near future. As usual, stay safe.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.