Gogo Inc (GOGO) 2020 Q3 法說會逐字稿

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

I would now like to hand the conference over to your speaker today, Mr. William Davis, VP of Investor Relations. Thank you, sir. Please go ahead.

Thank you, Polly, and good morning, everyone. Welcome to Gogo's Third Quarter 2020 Earnings Conference Call. Joining me today to talk about our results are Oakleigh Thorne, President and CEO; Barry Rowan, Executive Vice President and CFO.

Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on the conference call. These risk factors are described in our press release filed this morning and are more fully detailed under the risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is November 9, 2020. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events.

During the call, we'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 third 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.

Thank you, Will, and good morning, everyone. Welcome to our third quarter conference call. Given the impact of COVID on the aviation industry, Gogo delivered a solid quarter and made significant progress on our strategic, operating and financial initiatives capped off with the late August announcement that we signed an agreement to sell our Commercial Aviation division to Intelsat, the world's largest satellite company.

Having achieved that milestone, we're now focused on 3 priorities: first, closing the aforementioned transaction and successfully migrating CA into Intelsat; two, relaunching the remaining Gogo to investors as a profitable communications provider focused on the business aviation industry; and three, strengthening our balance sheet and improving cash flow by reducing leverage, lowering our cost of capital and lowering our debt service.

As you probably saw in our earnings release, results from our Commercial Aviation segment will now be accounted for as discontinued operations and assets held for sale. So my comments on the quarter will primarily focus on Business Aviation.

Overall, we're encouraged by the recovery we've seen in the aviation industry, particularly in the BA market. We also believe that this morning's announcement of what appears to be a highly effective COVID vaccine from Pfizer, bodes very well for a rebound of the Commercial Aviation industry next year. Today, I'll give you an overview of the quarter and report on our progress against the 3 priorities I just mentioned. Later, Barry will go over the Q3 numbers, discuss the $50 million tack-on facility and provide an update on opportunities to refinance our debt.

Let me comment on the tack-on for a moment, though we still feel very good about our transaction with Intelsat, we currently live in a very uncertain world and feel that adding some buffer capital to our balance sheet is the prudent thing to do.

Before I get started, I want to give a huge shout out to our CA, BA and corporate teams. This has been an extremely trying year, not only due to COVID and the actions we've had to take to respond to that challenge, but also because of all the hard work we've done and are still doing as part of the Intelsat transaction. So thank you.

Let me start with our first primary priority, which is closing the Commercial Aviation transaction. Both Intelsat and Gogo's teams are really excited about the synergies and innovation this combination will bring to the in-flight connectivity market. We've built a robust program management structure with representatives from both companies to oversee 11 functional teams working on plans to quickly separate the Gogo CA division from Gogo and integrated into Intelsat as soon as we clear the regulatory process and close the deal.

From a regulatory standpoint, we've made substantial progress. We've already cleared the U.S. Hart-Scott-Rodino process and all foreign jurisdiction antitrust requirements, and we've received all but 1 foreign telecommunications approval. We're continuing to work closely with Intelsat to complete a review by CFIUS and to secure FCC approval for the transfer of 2 earth station licenses and an experimental license. The public comment period for their station licenses ended last Friday, but we won't know until later today, whether anyone followed a comment or not. So we've made a lot of progress since announcing the transaction, and though it's hard to predict the exact timing of what happens in the regulatory process, we feel we're on schedule to close before the end of Q1 2021, as we guided at the time the deal was announced.

Now let me move on to third quarter results for a moment. Continuing operations, which represent our former Business Aviation segment and our former unallocated corporate costs reflect encouraging continued service demand recovery. Generally speaking, the BA market had a shallower COVID related bottom and has had a faster recovery than the commercial aviation market. In Q3, our customers were back to flying 81% of the number of flights they flew in the prior year, up from 47% in Q2. And in October, that grew to 83% of prior year flights. Interestingly, our large fleet operators ran much higher at 100% of prior year for the quarter, which we hope will push demand for more aircraft and more connectivity in that segment. As a result of these trends, we saw a significant sequential improvement in service and equipment demand compared to Q2 2020.

And let me start with service revenue. Service revenue grew 21% over Q2, though still down 4% from Q3, 2019. Total ATG aircraft online reached 5,577, up more than 3% from prior quarter. And ARPU grew to $2,996 per month, up more than 17% from prior quarter. In the pandemic world, where less bad can be good, I would note that the 5,577 AOL number is down only 2% from our all-time high in Q1, 2020, and at the $2,996 ARPU number is down only 6% from our all-time high in Q4 of 2019. We had just over 500 gross ATG activations in the quarter, of which 231 or 46% were new accounts.

As we discussed on our Q2 call, what hurt our AOL and ARPU numbers in the COVID swoon, were the large numbers of suspensions and planned downgrades we experienced back in April and May. Of the approximately 1,100 suspensions we experienced in that time frame, 75% have now come back online, and 92% of those returned to their old plan or a higher price plan. Of the 928 downgrades we experienced in that period, 71 of upgraded and 87% of those who upgraded returned to the same plan or purchased a higher price plan compared to the plan they had before they downgraded.

We think all of these service trends and the fact that many industry pundits think the pandemic will be a catalyst for BA, bode well for our BA service revenue in the future.

Now let me turn to equipment revenue, where we're seeing signs of recovery, with 25% growth in Q3 over Q2, though that's still down 49% from Q3, 2019. That revenue growth was entirely driven by shipments of ATG advanced units, which have considerably higher monthly service ARPU than satellite units. Shipments hit 167 units for the quarter, up 67% from prior quarter, but still down 43% from prior year.

Satellite units has not had such a positive trend. 28 satellite units were shipped in Q3, down 58% from prior quarter and down 80% from same quarter prior year. On the earnings side, our continuing operations generated $30.2 million of adjusted EBITDA in the quarter, even when including the full cost of our corporate overhead. That's a 9% decrease compared to this period last year, but represents a 45% adjusted EBITDA margin.

The pace of recovery in BA excites us and gives us even greater confidence in our ability to drive growth as a more focused, stronger Gogo once the transaction with Intelsat is complete. I'll quickly touch on discontinued operations. Our former CA, NA and CA-ROW segments, where we're also starting to see some encouraging signs of recovery. We saw a 34% sequential increase in combined CA revenue in Q3 over Q2, though Q3 was still down 61% versus prior year.

A number of unusual events, which Barry will describe in more detail, elevated costs and payments for discontinued operations in Q3, including catch up on delayed satellite payments, accelerated depreciation for Delta deferred lease payments, bonus related stock-based compensation expense, inventory reserves and expenses from the Intelsat transaction.

We believe that as the world recovers from the pandemic demand for CA-IFC services will explode as airlines compete for passengers by providing free, high-quality WiFi, and we believe that our CA business vertically integrated with Intelsat, the world's largest satellite operator, will be extremely well positioned to compete in that exciting market.

Now let me turn to the relaunch of Gogo as a communications provider focused on the Business Aviation industry. That's priority 2. Our BA business operates in an industry with relatively little customer concentration, or 70% of the U.S. market still does not have broadband connectivity. That offers the industry's leading ISC product at an attractive price relative to competitive solutions, and it has unique advantages due to its proprietary spectrum, its strong ATG network and the exceptionally talented and knowledgeable employees who work there. Our recurring revenue model and the owner economics of our ATG network generates strong cash flow, but for the last several years, has been used to service the negative cash flow and debt associated with our CA business.

Finally, I would note that BA has demonstrated a strong history of successful product introductions, such as our advanced platform and our Gogo Vision entertainment products. We're in the midst of revitalizing our 5-year strategic plan, factoring in new data, notably, that we'll now have more capital to invest in product initiatives like Gogo 5G that will enable us to defend and grow our strong franchise.

As part of our planning, we're also looking for ways to optimize the corporate infrastructure that will need to support our BA business. Initially, we'll need to overinvest in corporate infrastructure in order to support transition services for Intelsat and to ensure the remaining Gogo can function as a stand-alone company. It will also take time to appropriately size and renegotiate some vendor contracts and our support infrastructure for a smaller-sized business.

So we do not see corporate expenses coming down much in 2021, and we'll discuss changes in the future when we complete our transition plans, which leads me to our third priority, rebuilding our balance sheet. Barry will provide more detail on the process we're going through to optimize this opportunity. But I'll state the obvious, which is that reorganizing our capital structure is very important to driving shareholder value for Gogo. Towards that end, we're focused on refinancing our debt to significantly reduce our leverage, decrease our debt service and provide flexibility for further delevering in the future.

As part of that plan, we'll also want to make sure we optimize the use of the net operating losses and other tax assets that we've accrued over the past several years. As I mentioned at the start today, we announced a $50 million tack-on to our senior secured notes to provide buffer capital as we work through our refinancing plans in these uncertain times.

Before I turn the call over to Barry, I want to again thank our Gogo team for their continued hard work, dedication and creativity. You've really shown your metal this year.

And with that, let me turn it over to Barry to do the numbers.

Thanks, Oak. For clarity, as we walk through this quarter's results, I'd like to start my comments by describing the impact on our financial statements from the planned sale of our Commercial Aviation division. We're very pleased to report that the transaction with Intelsat is on track, as Oak described. As a result, Gogo's financial statements will look very different this quarter. The Commercial Aviation business meets the accounting criteria to be classified as assets held for sale. And as such, the impact of balance sheet accounts have been presented this way. In parallel, the CA division's results have been presented as discontinued operations on the income statement and cash flow statement. In the 10-Q, we discussed the CA business in a footnote we produced for discontinued operations. As a result, our continuing operations include our Business Aviation division and the expenses that were formally categorized as unallocated corporate costs. These figures for continuing operations will be comparable to the former BA segment reporting through the cost of service and equipment lines. The expenses previously categorized as unallocated corporate costs will be included in G&A.

Before getting into a summary of our operational results, I'd like to highlight several points at the corporate level. First is our cash position and cash flow. We exited the third quarter with $117 million of cash, which was down from $156 million at the end of the second quarter and represents a $39 million reduction in our cash position. There are some important timing aspects reflected in the negative cash flow or interest from continuing and discontinued operations this quarter in contrast to the breakeven level reported for the second quarter of this year.

During the second quarter, we were in the middle of negotiations with many of our Satcom suppliers to provide us with economic relief as the COVID crisis emerged. Because of the stage of those discussions, we held back payments during that period.

As we mentioned on our second quarter call, our satellite providers took a very partnership like approach with us, and we reached agreements with all of them, saving at least 50% on most of our satellite contracts. During the third quarter, we paid these outstanding invoices to bring them current. This resulted in us paying $47 million to Satcom vendors during the third quarter. This was an increase of $37 million from the second quarter and explains virtually all of the difference in the cash flow between these 2 quarters. The cash flow before interest expense from continuing operations during the third quarter was strongly positive and approximately equal to the level achieved during the second quarter.

As we look to the fourth quarter, we expect to achieve modestly positive cash flow before interest expense for Gogo as a whole. We expect to exit 2020 with approximately $70 million in cash before considering the proceeds from our $50 million tack-on financing, but reflecting the impact of our $53 million semiannual interest payment in November.

As you know, we have been very judicious about managing our liquidity through COVID. With the continuing uncertainty of the pandemic and its impact, especially on our Commercial Aviation business, we deemed it prudent to add some buffer capital to our balance sheet this quarter. In partnership with our creditors, we increased our senior secured note facility, which we were able to do on favorable terms due to the company's improved credit profile.

We announced this morning that we have executed a $50 million financing as a tack-on to our existing senior secured notes, which will be financed by 3 of our bondholders. We expect the funding to occur this week. We have also committed to issue additional equity securities with net proceeds of at least $20 million by May 5, 2021, in the unlikely event that the Intelsat transaction has not closed by that date.

We're continuing to manage expenses very tightly during this period. For reference, in the extremely unlikely event that the Intelsat transaction were to not close during 2021, we would manage the 2021 cash burn to be less than $40 million based on the 16 cost management levers we have described on previous calls.

Excluding the impact of the tack-on and related equity proceeds, this would mean that we'd exit 2021 with $30 million in available cash, and we have other levers we could pull to maintain adequate liquidity in the event of this highly unlikely scenario.

A final point I'd like to touch on at the corporate level is stock compensation expense. As noted on our last earnings call, we have planned for our annual operating bonuses to be paid in stock, unless determined otherwise by our compensation committee. Based on our expected financial results, employees will earn a bonus for our 2020 performance, and $13.2 million in stock compensation expense was recorded during the quarter. Approximately $8.5 million of this expense was for CA and is included in discontinued operations, and $4.7 million is reflected in continuing operations.

I will now turn to a discussion of our third quarter operating results, beginning with our continuing operations. Again, these results include the former BA segment and unallocated corporate costs. As Oak described in some detail, our business aviation business was not hit as hard by COVID as CA, and it has recovered more quickly.

The rebound in BA is reflected in its financial performance. Total revenue from continuing operations was $66.5 million. While this was down 18% from the year ago quarter due to COVID, total revenue grew 22% sequentially, reflecting the rebound in Business Aviation from the low point in the second quarter of this year. This revenue improvement occurred in both service and equipment revenue.

On a year-over-year basis, service revenue of $53.3 million declined just 4%, and was up 21% sequentially, reflecting strong customer reactivation. As Oak mentioned, 92% of previously suspended accounts renewed at equivalent or upgraded subscription plans as compared to pre-COVID plans. The equipment revenue of $13.2 million, was down 49% over the same quarter a year ago, but grew 25% over the second quarter of this year. We're seeing a strong pickup in equipment sales from our flagship AVANCE ATG product platform, as Oak mentioned. Notably, September equipment sales were higher than January, and September service revenue was over 90% of the January pre-COVID levels.

The primary driver of the sequential increase in service revenue was ATG ARPU. This accounts for approximately 80% of the revenue increase as the vast majority of customers reinstated their service plans at equivalent or upgraded levels. After dropping over 18% sequentially in the second quarter due to COVID, ATG ARPU rebounded during the third quarter to $2,996, which is up 17% sequentially. An important indicator of the BA recovery is that ATG ARPU for the third quarter was 97% of the year ago level of $3,087.

The balance of the $8.8 million sequential increase in revenue was due to higher units online, which reached 5,577 for the quarter, up 3% sequentially. The solid recovery in BA's top line has carried through to the bottom line for our continuing operations, as we have managed expenses tightly across the company. Adjusted EBITDA for continuing operations was $30 million for the third quarter, this is up 36% sequentially from $22 million in the second quarter of 2020, and is down just $3 million from the third quarter of 2019.

As a reference point, the annualized 2020 adjusted EBITDA for continuing operations is approximately equal to the full year adjusted EBITDA for 2019, which was $122 million. BA has also maintained attractive gross profit margins during the COVID pandemic, with service gross margin of 78% for the third quarter of 2020. This compares to 81% achieved for the past 2 full years.

Equipment margins have decreased somewhat from the 41% achieved for each of the past 2 full years to 35% this quarter. This 6% decline reflects the fixed costs associated with our manufacturing operations with the lower equipment shipments during the pandemic. The combined expense categories of engineering, design and development sales and marketing and G&A for continuing operations decreased to $20.8 million, down 18% from the third quarter of 2019.

During the third quarter of this year, we spent roughly $2.4 million less on 5G development versus the year ago quarter. Somewhat due to the timing of this ED&D spending, adjusted EBITDA margins for the continuing operations came in at 45% for the quarter, the highest level achieved for at least the past 7 quarters.

Finally, cash flow from operating activities for continuing operations was $20.3 million for the first 3 quarters of 2020, which included $53 million of interest payments. By this measure, continuing operations cash flow, excluding interest, has been relatively consistent by quarter throughout the year.

You will see from the significantly revised 10-Q filing that interest expense is assigned to continuing operations. So cash flow from continuing operations will reflect our semiannual interest payments in May and November. While our Commercial Aviation business is treated as discontinued operations in our financial statements, let me offer a couple of comments on our CA business.

CA continues to be quite hard hit by COVID, although service revenue exceeded our internal forecast during the third quarter. CA service revenue was $40.5 million, reflecting a 61% decline from the third quarter a year ago. However, service revenue grew 34% sequentially from the second quarter of this year when the impact of COVID first emerged. The CA business generated a net loss of $71.2 million, this included -- includes $27 million of accelerated depreciation, offset by $18 million of accelerated amortization of deferred lease proceeds, both related to the Delta contract amendment signed in the second quarter of 2020. The net loss also includes approximately $20 million of stock-based compensation expense, inventory reserves and transaction expenses.

As we look ahead, I thought it might be helpful to offer some perspective on both the transformational Intelsat transaction as well as our retained BA business. In our view, the Intelsat transaction represents a rare win, win, win opportunity in the world of dealmaking. We believe it should be good for Gogo, good for Intelsat and for the CA employees. We have long said, we believe CA would benefit from being a part of a larger entity, and the industrial logic for the Intelsat acquisition is very compelling.

We are glad to see Intelsat's interest in establishing Gogo CA as a strategic platform, built on strong market position and talent of the Gogo employees. We are enthusiastic about the business and cash flow generation capability of Business Aviation as a stand-alone business.

As Oak described in some detail, there are multiple compelling factors, which contribute to BA's cash flow generation capability. Let me amplify on 2 of these, which will contribute directly to BA's cash flow generation in the years ahead. These include the significant tax benefits retained at BA post the Intelsat transaction and the opportunity to significantly reduce interest rate expense through a comprehensive refinancing.

As of September 30, 2020, Gogo had over $700 million in federal and over $450 million in state net operating loss carryforwards. In addition, we had approximately $170 million in federal interest expense carryforwards. At today's corporate tax rate, these benefits will reduce BA's future federal tax liability by over $175 million.

While we expect the closing of the CA sale to utilize a portion of these tax benefits, these tax attributes will benefit the company for years into the future.

Now I'll turn to the refinancing opportunity we see in front of us. As you know, from the structure of the CA transaction, all of the company's debt will remain with Gogo. In parallel with pursuing the close of the Intelsat transaction, we have been evaluating a range of financing -- a refinancing alternatives as 1 of the 3 key priorities Oak outlined. We have been performing this analysis with several considerations in mind. Gogo's optimal capital structure; secondly, the appropriate timing for the refinancing; and thirdly, achieving as much strategic and operational flexibility as possible.

Given the enhanced creditworthiness of BA on a stand-alone basis, we believe we will be able to significantly reduce our interest expense through a comprehensive refinancing of our balance sheet. While we cannot predict the future state of the capital markets, they are currently very strong. If these conditions persist, we would expect to refinance our senior secured notes by no later than their first call date in May of 2021. We think it is likely that Gogo could achieve a ratings upgrade, which would enable us to tap into more attractive capital sources at significantly lower rates than we were paying today.

If we were to do this refinancing in today's markets, we believe we could cut our interest expense by nearly half, saving as much as $50 million annually after the balance sheet is fully refinanced.

Now I'd like to offer a couple of additional comments regarding future financial expectations. We will not be providing guidance on this call because we have not closed the Intelsat transaction and there is still meaningful uncertainty around the ongoing impact of COVID on our business. Also, as Oak described, we are in the middle of developing strategic and long-term financial plans for BA as a stand-alone business. However, I will offer a couple of comments on our continuing operations as we look forward to 2021. First is regarding our expectations for what were previously classified as unallocated corporate costs, and are now included as part of G&A for continuing operations. We have brought these costs down from $46 million in 2018 to approximately $35 million in 2020 as a result of the integrated business planning process we launched in 2018.

We see opportunities to further reduce these expenses over time as BA is a smaller organization. However, we expect these costs to remain at approximately the 2020 level during 2021 as we want to ensure stability in these functions post the Intelsat transaction. We would expect these expenses to reduce beginning in 2022. For the fourth quarter of this year, we expect to see some sequential increase in expenses versus the third quarter due to increased ED&D project spending and the foregone CEO bonus, which was reversed in the third quarter.

As a result, we expect lower adjusted EBITDA from continuing operations for the fourth quarter of 2020, from the third quarter of 2020. As Oak mentioned, we are in the middle of conducting a deep dive review of our BA business, which will result in refreshed strategic and long-term financial plan. As a part of this process, we will assess key capital allocation alternatives, including the timing of our 5G rollout, long-term leverage targets, adjacent product and market opportunities and the like.

During the years of investing heavily in our CA business and more recently, during the COVID pandemic, we've had to be very judicious about the levels of investment in BA. As a result, we have probably under-invested relative to what we might have done will with BA, a stand-alone business.

We will certainly bring our culture of planning rigor and financial discipline to this process. But we also believe there are opportunities within this attractive market, which we want to aggressively pursue as we work to drive value.

As I conclude my prepared remarks, I want to again join Oak in thanking our fellow employees for their tremendous commitment, creativity and work ethic during these challenging times. Not only have we had to navigate for the turbulence of the COVID pandemic, you have enabled us to successfully reach an agreement on the CA sale and are now working tirelessly through the many integration activities due to the strength and dedication.

Through it all, you have demonstrated a spirit of partnership and even adventure for what lies ahead. Thank you so much. Operator, we're now ready for our first question.

(Operator Instructions) Your first question comes from the line of Phil Cusick with JPMorgan.

This is Sebastiano.

It's Phil, I got it. How do you think about balancing BA free cash flow versus investing to grow and what's the optimal leverage? And then I have a couple of follow-ups.

Yes, Phil, this is Oakley. We're actually -- that's all part of our financial planning, and I think we'll give more guidance on that in our Q4 call. We look at this. There are a number of sources of -- a number of things will drive cash flow, including the NOLs, obviously, the business itself.

We want to reinvest in order to develop 5G and other new products to continue to strengthen the franchise, and we want to delever. So as you say, it's a balancing act between all those things and as we finish up our planning, we'll sort of have that optimal balance figured out as part of what we're doing.

Okay. And what's the ability to retain flexibility on those tax assets on any kind of sale of the business?

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

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

Okay. And last thing, Oak, how do you think about BA being better in a larger entity as well as CA? Does this business have enough scale to remain independent over time?

I think it does have enough scale to remain independent because it's very cash flow generative, and it can invest in developing highly specialized products for a niche market.

So I think that it can remain independent. Obviously, there are a lot of strategic players who would love to own it. So that's always a good thing. We are focused on driving shareholder value. And in the end, we'll do whatever we think optimizes that.

So we don't have any -- right now, we're planning to stay a public company and manage ourselves as we've sort of outlined. And so there's no change in that plan, but it could change over time.

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

A couple of questions. Follow-up on Phil's question maybe a little bit there. How should we think about the CA to BA reimbursements? Have those been fully reflected in this continuing, discontinuing operations? And what's the potential in the future as you roll out the 5G ATG network to get more reimbursements from the CA business once it's over an Intelsat?

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

Yes.

Yes. That business starts out relatively modestly. It goes up a level when we get 5G launched as that there is an incentive to get 5G out in the market. And I don't think we're going to give any more guidance than we gave at the time of the deal, which is that there's 2 components to this. One is the rev share itself, and then the other is the minimum revenue guarantee that they would have to pay us if they want to maintain exclusivity. And Barry, I think that over the 10 years, we -- I think we guided that, that was roughly $170 million for the revenue guarantees, is that right?

Yes. That's right. Yes, $170 million. Yes. And Ric i mean...

Yes. So I -- go ahead, Barry.

So I was just looking to address the first part of your question also, which is related to the CA to BA reimbursements. And to your question, we have not finalized those out, as Oak mentioned, we're very active in the transition planning process with these 11 teams. There is the capability to have transition service agreements. So we're working through all the details of those by function. And as those get finalized over the coming weeks, we'll see what those reimburses look like. But generally, the contract provides for those to be reimbursed on a cost-plus basis.

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

Yes. We're in the middle of the OpEx spend as we're doing the development with our 3 primary partners. So we're well along in that, but that will continue certainly through next year.

We have not started spending in real meaningful ways on the CapEx side other than capitalizing the software portion of that development. So as you know, the real OpEx spend is -- starts when we start installing the towers and the equipment on the towers, it's not the towers but the equipment on the towers. So we would expect to start seeing that happen next year, and then it will get rolled out an appropriate sequencing and time frame. And again, as we've said, the exact timing of that will be a part of this strategic planning process that we're going through.

Okay. And maybe from a more high-level strategic standpoint, how do you view what's happening in the competitive dynamics of the BA business? Any update as far as a more direct competitor that keeps kind of being on the edge?

They have a new CEO. I think you're asking about SmartSky.

Yes.

They still have, I think, a lot of technology challenges in terms of being able to launch a network and then they're going to need to fund a lot of operating losses while they try and ramp the revenue.

So our view is our product is going to be better -- is better than theirs and will be better than theirs. Our 5G product, will not only use the 60 megahertz of unlicensed spectrum of value that they'll use, but we will have our 4 megahertz of licensed, clean spectrum, which will make the products a lot better wherever there's interference with the unlicensed spectrum.

So that and the fact that we've been doing this a long time. We have a much longer distance between the tower and the aircraft just because of the way we've been able to engineer the products, they still haven't figured that out. And so their CapEx is going to have to be a lot higher than ours. They're going to have higher tower density than we have.

On the competitive front, I guess I'm not really as worried about them as I am, the guys that compete with us at the top of the market. We've -- we faced very strong competitors today in ViaSat and Inmarsat. And they obviously are eyeing the BA market as a growth opportunity for them. So those are the ones we really focus on. And I guess the last point I'll make about competitive situation is that this is just a really unpenetrated market. I mean 70% of the U.S. market doesn't have any broadband yet.

So -- and a lot of that is, frankly, in smaller fuselage airplanes that we're better prepared to serve than Inmarsat or ViaSat are. So we think it's a growth market. We're not that focused on share as we are on absolute growth. And frankly, right now, I think we're uniquely positioned by virtue of having a product that is -- performs better than anybody else's product because of the low latency right now.

Also, it was particularly suited to the BA market because of the size of the fuselage and the equipment we have is much easier to put on, cheaper, more conducive to the size of the fuselage in the BA market and in our proprietary spectrum. So we view ourselves very competitive, frankly, are not as -- that worried about the SmartSky entrance and are focused on competing hard with the big guys, Inmarsat and ViaSat at the top of the market.

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

Congrats on the HSR ruling, and nice job on the BA results.

My lawyers would tell me to make very clear, it wasn't a ruling. It's just that we got the 32 -- 30-day period without a follow-up request.

Okay. Fair enough. I know you've mentioned this a couple of times in the call, but I just want to be clear. In terms of the corporate overhead allocation, that is fully reflected in the numbers as reported today. And the difference is like a little less spending in terms of 5G, it looks like in the current quarter. So as we go into 2021, that is kind of normalized base level depending on what is pending 5G.

Yes. So correct understanding expenses and the expectations we set there. As we look to next year, what we're really trying to be clear about is that the corporate spend that was considered cost side as unallocated corporate spend was approximately $35 million for all of 2020. It has come down, as you know, substantially over the last several years. But we expect it to remain in about that same ZIP code as we want to be thoughtful about ensuring that we have this transition well down. We can provide the transition services and so on during the course of 2021.

We will be actively looking at that set of expenses and certainly, the smaller size of BA when we concluded that we ought be able to spent less on external costs. The audit is not as complex and those kinds of things.

So we would expect those costs to come down beginning in 2022. But for 2021, we would expect them to kind of be in that general same area that they are for 2020.

Great. And just following up on some of the BA metrics you provided. Aircraft utilization is starting to come back, I think you said larger fleets are at 100%. I was wondering if you had any view in terms of your regional mix of your business, Northeast has certainly been a little bit more constrained in other areas such as Florida, Colorado, Southern California. Kind of help us understand that a little bit. And the units sold in the quarter, I think, were 167 million that you indicated, but I think you also indicated a number over 200 in terms of new customers and new aircraft. I wonder if you could reconcile that for us, is that 200 plus number, how should we be thinking about things on a more normalized basis going forward? And then I had 1 last final question.

Yes. The 2 -- I'll answer the last part and then let Barry handle the first part. The 200-plus number is activations, not shipments, right? So we ship units to dealers who put them in inventory to OEMs who also put them in inventory.

So those are installed on planes over time and then later activated. So the 500 number, of which 200 and some odd, about 46%, were new customers with activations, not units shipped. Okay. Does that makes sense?

It does. So Oak, does that mean then the channel is pretty clear at this point in time, there's not a lot of inventory sitting out there at dealers?

No. There's not much inventory sitting at dealers, and it's sort of -- it's getting certain noting -- it will dry up a bit because the units aren't hitting the same -- the units shift aren't as high as the activations, and that's a good indicator of future demand. So I think you're right about that.

And I'm sorry, the regional utilization? Yes.

Yes. Go ahead, Oak, take that one.

Well, yes. I mean, frankly, we aren't -- I don't have data for you on the BA market in that regard. I will say this. People are flying further this year. So about -- it won't sound like much, but if you think the average flight is 1.25 or something like that, it's up about 8 minutes overall.

So people are flying further, which would indicate to me that they are hunkered down somewhere. And when they find business, that somewhere is further away from the business than it was pre-COVID. In terms of the Commercial Aviation market, the Northeast has over -- just the second COVID hit the Northeast came down in terms of the number of flight departures and the South and West went up, and that continues to hold. That hasn't changed.

Great. And lastly, if I could, could you just give us an updated number in terms of the number of AVANCE or 5G ready aircraft that are out there at the current time? And in general, as it relates to 5G, you've got an opportunity to press an advantage. You're being certainly cautious in the near-term now until we get the closure of the CA sale from a cash perspective. But assuming that closes at the end of the first quarter, do you guys get more aggressive in pushing on that front to push your competitive advantage?

I'll answer the last part. Yes, is the answer, obviously. We -- as soon as we have money in the bank, we're going to try and move as fast as we can on 5G. And we'll update people on our 5G plans at a later date.

In terms of the -- I'm sorry, go ahead, it's about 1,500. I think we had a press release on that, not too long ago. There's maybe another 20 to 30 planes on top of that now.

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

Intelsat and still rationale discussed the benefits of going direct. And the CA asset would have likely fit with many other Satcom owners and operators as well. The deal helps intelsat remain competitive with vertically integrated Inmarsat and ViaSat. Intelsat also indicated that the deal helps them protect high margin revenue, if someone else were to have acquired you.

So with that being said, under what scenarios could cause the deal not to close? The deal was consummated in the middle of the pandemic. And after you already disclosed the need to renegotiate the Delta free contracts. So like what could possibly trigger a deal termination? And is there anything that you are overly concerned about?

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

Sounds good. And for Barry, you mentioned like different puts and takes with the cash flows this quarter. Do you have any estimate on what the ballpark net debt will be when the transaction closes in the first quarter?

As you know, Louie, the transaction is subject to the customary working capital adjustments, transaction costs to come out of that and so on. So I wouldn't speculate on what that number is going to be at this point and what the net number is on the $400 million.

But I think an important part of all this is that as we think about the refinancing and the transaction -- on the heels of the transaction, is that we'll have a meaningful amount of cash that gives us a lot of flexibility when it comes to the refinancing and what we do with the balance sheet. So we'll certainly have more to say about that as we get closer and see what the actual net cash position is as a result. But I think you can obviously do the math and see that it's going to have a very significant positive impact on our cash position.

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

Just a couple of quick ones first. Regarding the 1,100, I guess suspensions on the BA side that came from COVID, you said 75% is back online. Just wondering how many of those you expect to fully recover? And then quickly, if you could just elaborate on kind of the pace of the recovery month by month? I know you said in the quarter, it was 81% of flights kind of year-over-year, and that kind of bumped up to 83% in October. Any sense you can give us on how fast that maybe moved month-over-month within the quarter?

That's a little hard to say. I mean it came back very quickly in sort of the May, June, July time frame. So I think it was probably relatively consistent in the quarter. You have to remember in April, if you're -- typically, we're applying 3,000 to 3,500 flights a day, and we got down, I think our low point was something crazy like 90 flights 1 day.

So I would say that the bounce back was very quick, and it probably went up gradually over the quarter, but it was back up to those levels pretty soon in the quarter.

In terms of projecting the rate of recovery going forward, I think that's very hard to do. If you can tell me what's going on with COVID in 3 months, I can give you an answer maybe, but it without knowing a lot more certainly wasn't going to happen. I'm not going to make any guesses on that front.

The suspensions are almost back to just the normal suspension level. We get -- yes, don't hold me to the exact numbers, but we get 100 to 150 suspensions every month per people who are taking aircraft out of service, and don't want to pay for the the service while their claims are in the shop. And that's a typical reason they suspend.

And we're under 300 now suspended from the time frame that we talked about. Well, we're under 300 period. So we're not that much higher, frankly, than our normal rate, if you will.

So maybe -- we have maybe double the number we normally have. But it's not very high, call it another 150, we'd be right down at the normal level. So they're coming back. They're coming back at this point, it's starting to slow a bit, but we're also signing new customers and we're getting a lot of new growth. So we think we're pretty bullish on being able to grow unit -- continue to grow units from here. (inaudible).

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

Yes. The reason is -- go ahead, Oak.

Well, I was just going to say, there's a couple of things going on. Number one, we are going to have to perform transition services for Intelsat, we don't have that. We're still working on those. As Barry discussed earlier with the 11 functional teams, et cetera, et cetera, and the exact reimbursement scheme is still being worked on, et cetera. So we don't want to get over our skis on that.

And also, we have a lot of legacy work to do as a stand-alone company that by virtue of having own CA. We're still going to have a fair amount of tax work and other types of work to do through -- certainly through 2021. And so our planning around this is something we're going through right now, and we expect we'll start to see some saves in 2022. So we'll give more sense of direction on that in future calls when we have our transition plans complete.

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

Great. So Oak, you were talking a little bit about the satellite space. Maybe you could just comment on the LEOs. We got a Spacex public beta. And how do you see the LEOs playing in the Business Aviation world going forward?

Yes. I think we think that's an opportunity for us. And one of the virtues of having coming out of playing in the satellite world is that we've learned a lot about it. And so I think LEOs will enable smaller form factors in the future, and especially as ESA antennas come along. And so we find that all interesting and a good market opportunity for us.

Okay. Great. And on the delivery side, what are you hearing from the tech strongs of the world? And how are they getting past COVID on their side in terms of new shipments coming on and filling up your pipeline over the next few quarters?

Yes. I don't want to start angling all the OEMs by talking about what's going on in their business. I'm not going to do that. But I think that everybody would agree. There's still a good deal of uncertainty on exactly what orders are going to look like for next year. And as clarity comes about in terms of what's going to happen with the pandemic. I think that the OEMs will start nailing down their production schedules. But right now, I think everybody is in a wait-and-see mode.

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

The retrofit market is much larger than the OEM market. As you just look at the number of deliveries, there -- you measure the number of deliveries in the OEM market in the hundreds. And there are literally more than 10,000 thousand, many more than 10,000 aircraft out there without broadband in the aftermarket.

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

Almost everything last quarter would have gone on the (inaudible) last quarter.

And that's our last question, operator.

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

Thank you, Polly. Look, thank you for attending our Q3 earnings call. I think we're making significant progress on the priorities that I outlined earlier that is closing the Intelsat transaction, relaunching the new Gogo as a profitable communications provider to the Business Aviation industry and strengthening our balance sheet and improving cash flow by reducing our leverage, lowering our cost of capital and lowering our debt service.

We look forward to sharing more of our progress with you in the future as our strategic transition and refinancing plans come together to drive future Gogo shareholder value. And thanks again.

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.