Earnings Call Transcript - GOGO Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the two three twenty twenty Gogo Inc earnings conference call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require further assistance, please press star zero. 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.

Will Davis, VP of Investor Relations

Thank you, Polly. And good morning, everyone. Welcome to Gogo's third quarter twenty twenty 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 in 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 other documents we have filed with the SEC. In addition, please note that the date of this conference call is November 9th, twenty twenty. 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 will 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 in the Investor Relations section of the Gogo website. The earnings press release is also available on the website. After management comments, we will host a Q&A session with the financial community only.

Oakleigh Thorne, President and CEO

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 three priorities: first, closing the aforementioned transaction and successfully migrating the commercial aviation division into Intelsat; second, relaunching the remaining Gogo as a profitable communications provider focused on the business aviation industry; and third, 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 business aviation 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 three 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; we still feel very good about our transaction. 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 teams. This has been an extremely dry 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. 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 division from Gogo and integrate it 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 US House, Scott Rodino process and all foreign jurisdiction antitrust requirements, and we received all but one foreign telecommunications approval. We are continuing to work closely with Intelsat to complete a review by CFIUS and to secure FCC approval for the transfer of two 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 filed 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 on schedule to close before the end of Q1 twenty twenty-one, as we guided at the time the deal was announced. Now, let me move on to the third quarter results for a moment. Continuing operations represent our former business aviation segment and our former unallocated corporate costs reflect encouraging continued service demand recovery. Generally speaking, the business aviation market had a shallow recovery, hit bottom, and has had a faster recovery than the commercial aviation market. In Q3, our customers were back to flying eighty-one percent of the number of flights they flew in the prior year, up from forty-seven percent in Q2. And in October, that grew to eighty-three percent of prior year flights. Interestingly, a large fleet operators ran much higher at one hundred percent of the 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 significant sequential improvement in service and equipment demand compared to twenty twenty. Let me start with service revenue. Service revenue grew 21 percent over Q2, still down four percent from Q3, twenty nineteen, totaling $80 million. Aircraft online reached five thousand five hundred and seventy-seven, up more than three percent from the prior quarter, and up to two thousand nine hundred ninety-six dollars per month, up more than 17 percent from the prior quarter. In the pandemic world where less bad can be good, I would note that the five thousand five hundred seventy-seven number is down only two percent from our all-time high in Q1 twenty twenty, and that the two thousand nine hundred ninety-six dollar output number is down only six percent from our all-time high in Q4 of twenty nineteen. We had just over 500 gross activations in the quarter, of which two hundred and thirty-one, or forty-six percent, were new accounts. As we discussed in our last call, what hurt our AOL and our revenue numbers in the COVID swoon were the large numbers of suspensions and downgrades. Of the approximately eleven hundred suspensions we experienced during that time frame, seventy-five percent have now come back online, and ninety-two percent of those returned to their old plan or a higher-priced plan. Of the nine hundred and twenty-eight downgrades we experienced, seventy-one percent have upgraded, and eighty-seven percent of those who upgraded returned to the same plan or purchased a higher-priced plan compared to the plan they had before they downgraded. We think all these service trends and the fact that many industry pundits think the pandemic will be a catalyst for business aviation bode well for our service revenue in the future. Now, let me turn to equipment revenue where we're seeing signs of recovery: twenty-five percent growth in Q3 over Q2, though that's still down forty-nine percent from Q3, twenty nineteen. That revenue growth was entirely driven by shipments of aircraft units, which have considerably higher monthly service fees. Our unit shipments hit one hundred and sixty-seven units for the quarter, up sixty-seven percent from the prior quarter, but still down forty-three percent from the same quarter the prior year. Light unit shipments have not had such a positive trend; twenty-eight satellite units were shipped in Q3, down fifty-eight percent from the prior quarter and down eighty percent from the same quarter the prior year. On the earnings side, our continuing operations generated thirty point two million dollars of adjusted EBITDA on the quarter, even when including the full costs of our corporate overhead. That's a nine percent decrease compared to this period last year but represents a forty-five percent adjusted EBITDA margin. The pace of recovery in business aviation 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. Quickly, I would like to touch on discontinued operations: our former CIA and CIA RW segments, where we're also starting to see some encouraging signs of recovery. We saw a thirty to forty percent sequential increase in combined revenue in Q3 over Q2, although Q3 was still down sixty-one percent versus the 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, depreciation for 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 in-flight connectivity services will explode as airlines compete for passengers by providing free, high-quality Wi-Fi. We believe that the 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 two. The business operates in an industry with relatively little customer concentration, as seventy percent of the U.S. market still does not have broadband connectivity that offers the industry-leading service at an attractive price relative to competitive solutions. It has unique advantages due to its proprietary spectrum and strong network, as well as the exceptionally talented and knowledgeable employees who work there. Our recurring revenue model and the economics of our network generate strong cash flow, which for the last several years has been used to service the negative cash flow and debt associated with our prior business. Finally, I would note that the business aviation segment has demonstrated a strong history of successful product introductions, such as our advanced platform and Gogo Vision entertainment products. We're in the midst of revitalizing our five-year strategic plan, factoring in new data notably that we will now have more capital to invest in product initiatives. We are looking for ways to optimize the corporate infrastructure that will support our business. Initially, we will need to invest in corporate infrastructure in order to support transition services for Intelsat and to ensure the remaining Gogo can function as a standalone company. We do not see corporate expenses coming down much in twenty twenty-one, and we'll discuss changes in the future when we complete our transition plans. This 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: reorganizing our capital structure is very important for driving shareholder value for Gogo. We'll focus on refinancing our debt to significantly reduce our leverage and debt service, as well as provide flexibility for further deleveraging in the future. We also aim to optimize the use of 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 mettle this year. And with that, let me turn it over to Barry to go over the numbers.

Barry Rowan, CFO

For clarity, as we walk through this quarter's results, I'd like to start by describing the impact on our financial statements from the planned sale of our commercial aviation division. We are very pleased to report that the transaction with Intelsat is on track, and 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; thus, the impacted balance sheet accounts have been presented this way. In parallel, the business aviation division's results have been presented as discontinued operations on the income statement and cash flow statement. In the two discussions of the business aviation division, the financials for continuing operations include our business aviation division and the expenses that were formerly categorized as unallocated corporate costs. These figures for continuing operations will be comparable to the former business aviation 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. The first is our cash position and cash flow. We exited the third quarter with one hundred seventeen million dollars in cash, which was down from one hundred fifty-six million at the end of the second quarter, representing a thirty-nine million dollar reduction in our cash position. There are some important timing aspects reflected in the negative cash flow before 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 Satellite communication suppliers to provide us with economic relief as the COVID crisis emerged, and because of the delicate stage of those discussions, we held back payments during that period. Our satellite providers took a very partnership-like approach with us, and we reached agreements with all of them, saving at least fifty percent on most of our satellite contracts. During the third quarter, we paid these outstanding invoices to bring them current. This resulted in us paying forty-seven million dollars to satellite communication vendors during the third quarter, an increase of thirty-seven million dollars in the second quarter, and explains virtually all of the difference in cash flow between these two 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 twenty twenty with approximately seventy million dollars in cash before considering the proceeds from our fifty million dollar tack-on financing, but reflecting the impact of our fifty-three million dollar semiannual interest payment in November. 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 notes facility, which we were able to do on favorable terms due to the company’s improved credit profile. We announced this morning that we executed a fifty million dollar financing as a tack-on to our existing senior secured notes, financed by three 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 twenty million dollars by May 1st, twenty twenty-one in the unlikely event that the Intelsat transaction has not closed by that date. We are 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 twenty twenty-one, we would manage the twenty twenty-one cash burn to be less than forty million dollars based on the sixteen 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 would exit twenty twenty-one with thirty million dollars in available cash. 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 twenty twenty performance and thirteen point two million dollars in stock compensation expense was recorded during the quarter. Approximately eight point five million dollars of this expense was for the discontinued operations and is included in discontinued operations, while four point seven million dollars is reflected in continuing operations. Now I’ll turn to our third quarter operating results, beginning with our continuing operations. Again, these results include the former business aviation segment and unallocated corporate class. Our business aviation division has not been hit as hard by COVID, and it has recovered more quickly. The rebound in business aviation is reflected in its financial performance. Total revenue from continuing operations was sixty-six point five million dollars. While this was down eighteen percent from the year-ago quarter due to COVID, total revenue grew twenty-two percent 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 at fifty-three point three million dollars declined just four percent and was up twenty-one percent sequentially, reflecting strong customer reactivations. As Oakleigh mentioned, ninety-two percent of previously suspended accounts renewed at equivalent or upgraded subscription plans as compared to pre-COVID plans. Equipment revenue of thirteen point two million dollars was down forty-nine percent over the same quarter a year ago, but grew twenty-five percent over the second quarter of this year. We are seeing a strong pickup in equipment sales from our flagship product platform, as mentioned, notably in September. Equipment sales were higher than in January and September. Service revenue was over ninety percent of January pre-COVID levels. The primary driver of the sequential increase in service revenue was activity in the business aviation market, which accounts for approximately eighty percent of the revenue increase as the vast majority of customers reinstated their service plans to equivalent or upgraded levels after declining over eighteen percent sequentially in the second quarter due to COVID. In the third quarter of twenty twenty, we rebounded to two thousand nine hundred ninety-six dollars, which is up seventeen percent sequentially. An important indicator of recovery is that the adjusted ARPU for the third quarter was ninety-seven percent of the prior year level of three thousand eighty-seven dollars. The balance of the eight point eight million dollars sequential increase in revenue was due to higher units online, which reached five thousand five hundred seventy-seven for the quarter, up three percent sequentially. The solid recovery in the 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 thirty million dollars through the third quarter. This is up thirty-six percent sequentially from twenty-two million in the second quarter of twenty twenty and is down just three million dollars from the third quarter of twenty nineteen. As a reference point, the annualized twenty twenty adjusted EBITDA for continuing operations is approximately equal to the full year adjusted EBITDA for twenty nineteen, which was one hundred twenty-two million dollars. EBITDA has also maintained attractive gross profit margins during the COVID pandemic. Service gross margin was seventy-eight percent for the third quarter of twenty twenty, which compares to eighty-one percent achieved for the past two full years. Equipment margins have decreased somewhat from the forty-one percent achieved for each of the past two full years to thirty-five percent this quarter. This six percent decline reflects the fixed costs associated with manufacturing operations with 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 twenty point eight million dollars, down eighteen percent from the third quarter of twenty nineteen. During the third quarter of this year, we spent roughly two point four million dollars less on 5G development versus the year-ago quarter, somewhat due to the timing of this. Adjusted EBITDA margins for continuing operations came in at forty-five percent for the quarter, the highest level achieved for at least the past seven quarters. Finally, cash flow from operating activities for continuing operations was twenty point three million dollars for the first three quarters of twenty twenty, which included fifty-three million dollars 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 for 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 business that continues to be quite hard hit by COVID, although service revenue exceeded our internal forecast during the third quarter. Commercial aviation service revenue was forty point five million dollars, reflecting a sixty-one percent decline from the third quarter a year ago. However, service revenue grew thirty-four percent sequentially from the second quarter of this year, when the impact of COVID first emerged. The commercial aviation business generated a net loss of seventy-one point two million dollars; this includes twenty-seven million dollars of accelerated depreciation, offset by eighteen million dollars of accelerated amortization of deferred lease proceeds, both related to the Delta Contract Amendment signed in the second quarter of twenty twenty. The net loss also includes approximately twenty million dollars 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 a return to business. In our view, the Intelsat transaction represents a rare win-win opportunity in the world of dealmaking. We believe the transaction should be good for Gogo, good for Intelsat, and for the employees. We have long said we believe Gogo would benefit from being part of a larger entity, and the industrial logic to the Intelsat acquisition is very compelling. We are glad to see Intelsat’s interest in establishing the commercial aviation division as a strategic platform built on the 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 standalone business, as I described in some detail. There are multiple compelling factors which contribute to base cash flow generation capability. Let me amplify a couple of these which will contribute directly to cash flow generation in the years ahead. These include the significant tax benefits retained post-Intelsat transaction, and the opportunity to significantly reduce interest rate expense through comprehensive refinancing. As of September 30th, twenty twenty, Gogo had over seven hundred million dollars in federal and over four hundred fifty million dollars in state net operating loss carryforwards. In addition, we had approximately one hundred seventy million dollars in federal interest expense carryforwards at today's corporate tax rate. These benefits reduce future federal tax liability by over one hundred seventy-five million dollars, and we expect that closing the sale will utilize a portion of these tax benefits. These tax attributes will benefit the company for four years into the future. I'll now turn to the refinancing opportunity we see in front of us. As you know, from the structure of the transaction, all of the company's debt will remain with Gogo. In parallel with pursuing the closing of the Intelsat transaction, we have been evaluating a range of refinancing alternatives as one of the three key priorities outlined. We have been performing this analysis with several considerations in mind: Gogo's optimal capital structure; the appropriate timing for the refinancing; and achieving as much strategic and operational flexibility as possible, given the enhanced creditworthiness from being on a standalone 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 date in May of twenty twenty-one. We think it is likely that we could achieve a ratings upgrade, which would enable us to tap into more attractive capital sources at significantly lower rates than we are 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 fifty million dollars annually after the balance sheet is fully refinanced. Now, I'd like to offer a couple of additional comments regarding future 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 I described, we are in the middle of developing strategic and long-term financial plans for Gogo as a standalone business. However, I will offer a couple of comments on our continuing operations as we look forward to twenty twenty-one. First, regarding our expectations for what we previously classified as unallocated corporate costs and are now included as part of G&A for continuing operations, we've brought these costs down from forty-six million dollars in two thousand eighteen to approximately thirty-five million dollars in twenty twenty as a result of the integrated business planning process we launched in two thousand eighteen. We see opportunities to further reduce these expenses over time, considering it is a smaller organization. However, we expect these costs to remain at approximately the twenty twenty level during twenty twenty-one, as we want to ensure stability in these functions post-Intelsat transaction. We would expect these expenses to reduce beginning in twenty twenty-two. For the fourth quarter of this year, we expect to see some sequential increase in expenses versus the third quarter due to increased media project spending and the forgone CEO bonus, which is reversed in the third quarter. As a result, we expect lower adjusted EBITDA from continuing operations for the fourth quarter of twenty twenty compared to the third quarter of twenty twenty. We are in the middle of conducting a deep dive review of our business aviation sector, which will result in a refreshed strategic and long-term financial plan. As part of this process, we will assess key capital allocation alternatives, including the timing of our five G rollout, long-term leverage targets, adjacent product and market opportunities, and the like. During the years of investing heavily in our business and more recently during the COVID pandemic, we've had to be very judicious about the levels of investment. We have probably underinvested relative to what we might have done as a standalone 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 thank our fellow employees for their tremendous commitment, creativity, and work ethic during these challenging times. Not only have we had to navigate the turbulence of the COVID pandemic, but you have enabled us to successfully reach an agreement on the sale and are now working tirelessly through the many integration activities. Throughout all this, you have demonstrated a spirit of partnership and a sense of adventure for what lies ahead. Thank you very much.

Operator, Operator

If you would like to ask a question, simply press star, then the number one on your telephone keypad. We will pass for just a moment to compile the Q&A roster. And your first question comes from the line of Sebastiano with JP Morgan.

Unidentified Analyst, Analyst

Hey guys, this is Sebastiano. Thanks for your time. How do you think about balancing the free cash flow versus investing to grow? And what's the optimal leverage? And then I have a couple of follow-ups.

Oakleigh Thorne, President and CEO

So this is Oakleigh. You know, actually, that's all part of our financial planning, and I think we'll get more guidance on that in our Q4 call. We look at this with a number of sources of cash flow generation, including the business itself. We want to really invest in order to develop 5G and other new products to continue to strengthen the franchise. And we want to do so, as you say, it's a balancing act between all those things. And, you know, as we finish our planning, we'll arrive at that optimal balance. That's part of what we're doing.

Unidentified Analyst, Analyst

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

Oakleigh Thorne, President and CEO

I think it's fairly limited at this point. I think the best thing for our shareholders may be to ensure we use those attributes as a source of delivering value.

Barry Rowan, CFO

No, not to add to that. It is typically difficult to retain that value. There may be some situations in which it could be retained, but that is also part of the comprehensive consideration that we’re making. I think the first priority is to drive value for the business and see the cash flow generative capability that comes in over the next several years.

Unidentified Analyst, Analyst

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

Oakleigh Thorne, President and CEO

I think it does have enough scale to remain independent because it's very cash flow generative. It can invest in developing highly specialized products for its niche market. We think it can remain independent. There are obviously strategic players who would love to own it, so that's always a good thing. We are focused on driving shareholder value. In the end, we’ll do whatever we think optimizes that. So, we don’t have any change in our plan right now to stay as a public company.

Unidentified Analyst, Analyst

Okay, thanks, guys.

Ric Prentiss, Analyst

Thanks for you guys. Glad to hear you made it through these difficult times. A couple of questions. How should we think about the CIA reimbursement that has been fully reflected in the continuing and discontinued operations? What’s the potential in the future as you roll out the 5G network to get more reimbursements from the CIA business once it’s over with Intelsat?

Barry Rowan, CFO

I just want to make sure you’re asking about the revenue share.

Ric Prentiss, Analyst

Yeah.

Barry Rowan, CFO

That starts out relatively modestly and goes up when you get to 5G. There’s an incentive to get 5G out in the market. I don’t think we’re going to provide more guidance than we gave at the time of the deal. There’s two components to this: the revenue share itself and the minimum revenue guarantee that they would have to pay us if they want to maintain exclusivity, which was roughly one hundred seventy million dollars for the revenue guarantees over a period.

Ric Prentiss, Analyst

That’s right. Thank you. There was a little bit of you being over a year difference on 5G costs. How should we think about what you have left to spend on the 5G initiatives in both OpEx and CapEx, and what time frames you might start spending? Are you going to wait for the deal to close? Or how should we think about the spread of those 5G costs?

Oakleigh Thorne, President and CEO

We’re in the middle of the OpEx spend even as we’re doing the development with our three primary partners, so we're well along in that. However, we have not started spending in real meaningful ways on the CapEx side, except for capitalizing the software portion of that development. As you know, the real OpEx spending starts when we begin installing towers and equipment on them. We would expect to start seeing that happen next year, and it’ll be rolled out at an appropriate sequence and time frame, which will be part of the strategic planning process.

Ric Prentiss, Analyst

Ok. From a more high-level strategic standpoint, how do you view what's happening in the competitive dynamics of the business aviation sector? Any update as far as the more direct competitors?

Oakleigh Thorne, President and CEO

You know, they have a new CEO. I think you’re asking about SmartSky. They still have, I think, a lot of technology challenges ahead 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 revenues. Our view is that our products are better than theirs and will continue to be. Our 5G product will not only use the sixty megahertz of unlicensed spectrum, but will leverage our four megahertz of licensed spectrum, making the product much better where there is interference with the unlicensed spectrum. Our experience teaches us that we have a much longer distance between the towers and the aircraft, which is something we've accomplished over time. They still haven’t figured that out. We believe we are well-positioned in terms of CapEx requirements that are lower than theirs, and our competitive front is focused more on competing hard with stronger competitors today, such as ViaSat and Inmarsat. These are the growth opportunities we keep an eye on. The bottom line is that seventy percent of the US market lacks broadband connectivity yet, which presents development opportunities.

Ric Prentiss, Analyst

It sounds like you will continue to do well.

Operator, Operator

Your next question comes from the line of Scott Sparrow with Roth Capital.

Unidentified Analyst, Analyst

Thanks for taking my questions. Congrats on the HSR ruling and nice job on the business aviation results.

Oakleigh Thorne, President and CEO

Well, my lawyers would tell me to make it very clear it wasn't a ruling, but that we got through the thirty-day period without a follow-up request.

Unidentified Analyst, Analyst

Okay, fair enough. I know you mentioned this a couple of times in the call, but I just want to make it clear that the corporate overhead allocation is fully reflected in the numbers as reported today. And the differences are like a little less spending in terms of 5G than the current quarter. So, as we go into twenty twenty-one, will that be kind of a normalized base level?

Barry Rowan, CFO

Yes, that’s correct. The spending expectations we set around that are part of the numbers you are seeing for the next year as we want to ensure that this transition is well-managed. We will certainly provide the transition services and so on during twenty twenty-one. However, we will actively assess those expenses in alignment with our smaller organization post-Intelsat. So, we would expect reductions in those costs beginning in twenty twenty-two.

Unidentified Analyst, Analyst

Great. Thank you. Following up on some of the metrics you provided, aircraft utilization is starting to come back. I think you said larger fleets are at one hundred percent. Could you share your view in terms of the regional mix of your business? The Northeast has certainly been more constrained compared to other areas such as Florida, Colorado, Southern California, which has raised interest? Could you help us understand this mix a little?

Oakleigh Thorne, President and CEO

I don't really have data regarding how the business aviation market is performing by region. However, people are flying further this year. If you consider that the average flight duration is about an hour and a quarter, it’s increased about eight minutes overall. So, they are flying a longer distance this year, indicating they are hunkering down somewhere when they fly for business—further away due to the COVID situation. Regarding the commercial aviation market in the Northeast, the second blow that hit the Northeast has decreased the number of flight departures, while those in the South and West have increased, and that trend holds true. That hasn't changed.

Unidentified Analyst, Analyst

Great. Finally, if I could get an updated number in terms of the number of events or 5G ready aircraft that are out there currently? Assuming that closure occurs at the end of the first quarter, do you become more aggressive in pushing that front to enhance your competitive advantage?

Oakleigh Thorne, President and CEO

Yes, that would be the answer. As soon as we have money in the bank, we’ll move as swiftly as we can on 5G. We will update people on our 5G plans at a later date. I think we had a press release on that, mentioning perhaps another twenty to thirty planes or so on top of that now.

Operator, Operator

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

Louie DiPalma, Analyst

Morning, guys. Regarding Intelsat and the rationale for the deal, could you discuss the benefits of going direct? The CIA asset fits well with many other SATCOM owners and operators as well. The deal helps Intelsat as a main competitor with vertically integrated Inmarsat and ViaSat. Intelsat indicated that the deal helps them protect high-margin revenue if someone else were to have acquired you. So, what scenarios could lead to the deal not closing?

Oakleigh Thorne, President and CEO

We aren't going to engage in hypotheticals. The deal is constructed tightly under the agreement. You can read the TSA and SEC filings, but we don’t see any risks at major levels for closing at this point.

Louie DiPalma, Analyst

Sounds good. Barry, you mentioned various financial aspects this quarter. Do you have any estimate on what the ballpark net debt will be when the transaction closes in the first quarter?

Barry Rowan, CFO

As you know, the transaction is subject to the customary working capital adjustments, which will come out of that figure. I wouldn’t speculate on what that number is going to be, and what the final net number will be with four hundred million dollars outstanding. It’s important for us to expect that we will have a meaningful amount of cash which gives us flexibility regarding refinancing and what we do with the balance sheet. We’ll have more to say about that as we approach the closing date.

Louie DiPalma, Analyst

Great. That's it for me.

Operator, Operator

Your next question comes from the line of Greg Jarvis with Northland Securities.

Greg Jarvis, Analyst

Thanks for taking questions. Regarding the eleven hundred suspensions affecting businesses due to COVID, you mentioned seventy-five percent are back online. I was wondering how many of those you expect to fully recover. Additionally, could you elaborate on the monthly recovery pace? I believe you said it reached eighty-one percent in Q3 and eighty-three percent in October. What can you tell us about that?

Oakleigh Thorne, President and CEO

You know, that's a little hard to say. It rebounded very quickly in May, June, and July, so I think it was probably relatively consistent. You have to remember that in April, typically we are flying three thousand to thirty-five hundred flights a day, and we got down to something like ninety flights one day. So, I'd say that the bounce back was very quick, gradually increasing over the quarter. However, moving forward with predicting the recovery rate is difficult to ascertain without clearer insight into COVID developments over the next three months. Regarding the suspensions, we're almost at a normal suspension level now. We typically get 100 to 150 suspensions each month for people who are grounding their aircraft for service and don’t wish to pay for services during that period. Overall, we’re under three hundred now from the previous time frame we discussed. We’re about double our normal rates now, but it’s coming back.

Greg Jarvis, Analyst

Thanks for the clarity there. Could you provide some perspective on the unallocated corporate costs? Tell us how they’re trending, seeing they have been reduced from forty-six to thirty-five million.

Barry Rowan, CFO

The reason for those being flat in twenty twenty-one relates to the transition services to be provided for Intelsat. We do have a portion of work that revolves around pre-existing obligations we need to tune up after acquiring the commercial aviation division. We’ll need to conduct relevant tax work and ensure minimal disruption to operations during the period. We expect to see reductions beginning in twenty twenty-two. We will have additional guidance to offer as we finalize our transition plans.

Operator, Operator

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

Landon Park, Analyst

Good morning, guys. Could you speak a bit about the satellite landscape, such as the presence of LEO satellites? How do you see the LEOs playing out in the business aviation world going forward?

Oakleigh Thorne, President and CEO

We see that as a strong opportunity moving forward. Having come out of this satellite world, we've learned a lot, especially regarding deployment strategies. I think LEO will enable smaller form factors in the future, and we find that particularly impactful.

Landon Park, Analyst

On the delivery side, what are you hearing from the manufacturers about getting deliveries past COVID? How is that affecting your pipeline over the next few quarters?

Oakleigh Thorne, President and CEO

I don’t want to anger the OEMs by discussing their business. There is still uncertainty about what deliveries will look like for next year. As clarity improves regarding the pandemic, the OEMs will start confirming their production schedules.

Landon Park, Analyst

What percent of your activations came from OEM versus retrofits?

Oakleigh Thorne, President and CEO

The retrofit market is much larger than the new deliveries. You look at new deliveries in the hundreds while many more than ten thousand aircraft lack broadband in aftermarket segments.

Landon Park, Analyst

Thanks so much.

Operator, Operator

We will now turn the call back over to Mr. Oakleigh Thorne for concluding remarks.

Oakleigh Thorne, President and CEO

Thank you for attending our Q3 earnings call. I think we are making significant progress on the priorities I outlined earlier. That is closing the Intelsat transaction, relaunching Gogo as a profitable communications provider focused on the business aviation market, and strengthening our balance sheet while improving cash flow by reducing leverage, lowering our cost of capital, and minimizing our debt service. We look forward to sharing more of our progress in the future as our strategic transition and refinancing plans come together to drive shareholder value. Thank you again.

Operator, Operator

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