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Gogo Inc (GOGO 0.65%)
Q1 2019 Earnings Call
May. 9, 2019, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Gogo Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference may be recorded.

I would like to introduce your host for today's conference Mr. Will Davis, Vice President, Investor Relations. Sir, please go ahead.

William Davis -- Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to Gogo's First Quarter 2019 Earnings Conference Call. Joining me today to talk about our results are Oakleigh Thorne, President and CEO; and Barry Rowan, Executive Vice President and CFO.

Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described in our press release filed this morning and are more fully detailed under the caption Risk Factors in our annual report on Form 10-K and 10-Q, and other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 9, 2019. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we'll present both GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings press release. This call is being broadcast on the Internet and available on the Investor Relations section of Gogo's website at ir.gogoair.com. The earnings press release is also available on the website. After management's remarks, 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.

Oakley Thorne -- President, Chief Executive Officer and Director

Thanks, Will. Good morning and welcome to our Q1 2019 earnings call. For the year ago that I hosted my first Gogo earnings call, took the job as CEO for the same reason that I first invest in this company, a core belief in the value of delivering in-flight connectivity solutions and I believe that one can build a solid and profitable business delivering those solutions.

Our business proposition is simple. We grow as usage of in-flight connectivity grows. At this point, I don't think there's much argument about the fact that airborne bandwidth consumption is growing and we will continue to grow. Today's consumers want to connect from their home to the runway to 35,000 feet in the air. Usage is increasing across all of their sub-segments and we expect take rates to continue to grow in-flight connectivity is no longer a nice to have, but is a must have. Passengers expect it, aircraft operators want it, and airlines and aircraft owners are committed to providing it. But even more exciting Gogo has significant runway ahead of it, as both of our markets are largely unpenetrated. Business Aviation is roughly 25% penetrated in North America and only 15% penetrated globally. In Commercial Aviation, they're fairly well penetrated in North America, is only about 35% penetrated on a global basis.

So let me do a little retrospective. Last year, there were a lot of questions about whether our vision for Gogo was achievable. I think our Q1 results, which represents our fourth strong quarter in a row demonstrate that we're making great progress toward answering those questions. Past winter, we flew 22,000 deicing flights in the United States without one incident of degraded system availability due to the deicing fluid. We closed $925 million -- we recently closed and $925 million of debt issuances that defer the bulk of our maturities until 2024 and lower the interest rate and our senior secured notes by creating no dilution for shareholders.

We weathered the deinstallation of almost 550 of our old ATG aircraft, one of our largest customers and still managed to grow service revenue while signing up substantially all of our other ATG mainline fleets to upgrade to 2Ku. We've improved profitability and the value we provide to customers whether it's turnkey or airline directed model. Gogo can and will thrive under either as they both can be cash flow positive for Gogo.

We've improved quality as demonstrated by our 97% system availability in the quarter, versus 88% in Q1 a year ago. We've achieved significant cost savings and expect close to $50 million in IBP related cost reductions this year and we dramatically reduced our free cash flow burn, it was a $75 million improvement this quarter versus Q1 2018 and are now guiding to at least a $100 million improvement for the year. Driving these results has not been easy, and I want to thank and to acknowledge the entire Gogo team for our collective efforts, with our significantly strengthened position in solid trajectory, ready to go on the offensive and take advantage of the compelling growth in market to opportunities in front of us.

Now, let me turn to the quarter. Q1 delivered record adjusted EBITDA, very strong improvement in free cash flow and strong revenue -- and strong growth in our underlying service revenue. Though we had a few one off benefits that added roughly $11 million to adjusted EBITDA, even when you add those back, adjusted EBITDA would have hit record levels. I want to caution that we expect Q2 to be down significantly but if one backed out the one-time benefits from Q1 and adds them to our Q2 expectations, the two quarters would look fairly similar and both would be record adjusted EBITDA quarters. We expect Q2 adjusted EBITDA to be our trough for the year as the deinstalls are completed and we expect adjusted EBITDA to pick up from there in the second half.

BA service revenue grew a healthy 12%, however equipment revenue -- I'm sorry, BA service revenue grew a healthy 12%, however equipment revenue lagged due largely to installation capacity constraints caused by FAA ADS-B mandates, which I'll discuss in a moment. In the combined CA segments, we had service revenue growth despite the deinstalls, partly due to the one-time revenue I noted a moment ago, but also because of a nice jump in take rates. That strong underlying service revenue growth coupled with good cost controls and better-than-anticipated Satcom utilization drove a significant increase in profitability.

In our last call, I set out -- set objectives for the year and I think we made good progress in all six in the quarter. The first was to make steady progress toward turning free cash flow positive in our CA division, and we made great progress, achieving our first adjusted EBITDA positive quarter for the combined CA segments. We're not forecasting it will stay positive for all quarters going forward, but at least it's progress in the right direction.

The second was to invest in our BA business to protect our existing customer base and attack new segments. We're making good progress and our plans to achieve these objectives -- that objective, and we'll have more to say on that in future quarters. The third was to strengthen our balance sheet. The enthusiastic response to our notes offering allowed us to extend maturities and lower the interest rate on the bulk of our debt without any dilution to shareholders. This validates our decision last November to not refinance our full $362 million convertible bond. At the time, we said that we would deliver improved results that would allow us to refinance without further dilution, and we delivered on those promises. We also strengthened our (Technical Difficulty) ahead of our Gogo 2020+ plan and ahead of our own expectations.

The fourth objective was to invest in our people and improve our (Technical Difficulty) which we're trying to do with enhanced equity awards, better bonus plans and by presenting a clear and compelling vision for our future. Fifth was to continue maturing our business processes while maintaining our creative problem solving culture. Towards that end, we've been rolling out a number of management processes that were called for as part of our IBP plan announced last July. And sixth, we want to get out from under our shell and start to tell our story to the media and the stream. We've begun that by committing to several investor conferences, including three in the next month.

I'm also particularly pleased with our cost control in the quarter, where we manage satellite costs well and our IBP cost savings came through on every line of the income statement. As a result of our performance in Q1, we're raising our adjusted EBITDA guidance and tilting our cash flow improvement target in a positive direction.

Now, let me touch on strategy for a moment. From a strategic perspective, we see some recent events and trends that reaffirm our asset light technology agnostic product strategy. First is the unfortunate IntelSat 29e instant. Well, we're sorry this happened to our friends at IntelSat, we think this affirms our model in two important ways. First, because 29e was in the Ku constellation (inaudible) other Intel satellites. IntelSat has been able through restoration agreements to satellites belonging to their competitors. We were not on 29e, but had we been we would have been able to recover quickly.

Second, it highlights the risk airlines run if they rely on a closed Ka constellation if three or four satellites that are meant to cover the entire globe. If one of those satellites is knocked out, that airline could go direct for a substantial portion of the globe until their provider manage to launch another satellite. Given the huge increase in space debris and the risk that poses relying on three or four satellites for global coverage, it's like playing Russian roulette with your passengers' connectivity needs.

Today. Gogo partners with 12 satellite providers and utilizes 30 satellites, and most of our providers can move our usage to another satellite within hours or weeks at most if they were to suffer the same issue IntelSat just experienced. Another strategic trend we think reinforces our asset-light strategy is around the development of smaller more versatile satellites with dynamic beamforming technology. Today, when we lease capacity, we lease it 24/7, but we only use it when planes are flying underneath it. This architecture suffers low capacity utilization and is not particularly conducive to the extreme mobility of the Aero market where demand moves around the planet at all hours of the day.

We are working with our satellite partners on a dynamic beamforming technologies that are far better tuned to extreme mobility. They'll give us the ability to aim beams where we need them, when we need them, thereby dramatically improving capacity utilization and lowering per megabit costs in the future. Due to our open architecture, we'll be able to take advantage of these and future technology advances much more quickly than our competitors with closed systems. We must build and launch new satellites to achieve the same performance.

Another strategic tailwind is the increased interest by airlines in going free. Today, we have two airlines very successfully offering free service, Virgin Australia and Japan Airlines. While Virgin Australia is a relatively new development, GOL's (ph) offered free for the last three years on its domestic flights and in that time, it's moved several points of market share away from its rival ANA.

We believe an increase in the number of airlines going free could meaningfully increase demand and drive substantial growth for Gogo. Given our open architecture, we're well-positioned to ramp up capacity as airlines needed, and with some of the (Technical Difficulty) I just described a moment ago, we are well positioned to serve the dramatic increase in demand we believe free will drive in the future.

So we operate in a compelling and dynamic industry with (Technical Difficulty) technologies and shifting airline directed and turnkey models. We believe that Gogo's industry-leading in open technology allows us the flexibility to work with our carrier partners in any way they wish, whether it's free, airline directed, or turnkey. And we expect that capability to enable Gogo to remain a market leader into the future.

Now, let me dive into each segment for the quarter starting with BA. BA set records for service revenue, ATG aircraft online and ARPU for the quarter. Equipment revenue is not as strong as in the prior year, we shipped 187 ATG units down from 250 in Q1 2018, but we anticipate a rebound of shipments by year end. Shipments are down for a few reasons. First off, Q1 2018 was unusually strong as pent-up demand for our AVANCE platform was unleashed when we launched the product. Second, this year we underestimated the impact of the FAA's ADS-B mandate in the aftermarket. ADS-B stands for automatic dependent surveillance broadcast, that has been an initiative to improve traffic safety by the FAA for the past decade. It requires aircraft owners to install ADS-B equipment by the end of this year.

Apparently, more owners than we thought procrastinated and the MROs and dealers are now packed with planes trying to complete the install by year end. These installs are both crowding out budgets for ISC, but also literally crowding out shop floor space as dealers are booked with ADS-B installs.

The second issue has to do with timing and mix at the OEMs. Fewer EOM's have been a little slow moving from our classic ATG product and cutting in our AVANCE platform. So though units are about right -- right now we're selling more lower priced classic systems and AVANCE systems for new aircraft. We have linefit already for AVANCE at five OEMs and our OEM channel team feels that the shut ins will be complete at the other four by the end of the year.

On the activation front, we're up to 543 L5 customers and 187 L3 customers are activated and billing, with 35% of those customers purchasing streaming plans. A nice synergy between our divisions is our success selling Gogo vision to AVANCE customers. The vision was originally developed by CA, but we've been offering all AVANCE customers a 90-day free trial, and 50% of them have purchased the product. And because of the AVANCE platform software defined architecture, we're able to turn on the IFE product over the air without ever even touching the aircraft. Generally, we're feeling very good about our BA business and are particularly excited by some of the plans we are developing for our next-gen network, which we hope to be able to share shortly.

Now, let me turn to the Commercial Aviation division, which we report in two segments, CA North America and CA rest of world. Overall, we saw 100 incremental 2Ku aircraft added online for the quarter, the majority of which were new aircraft producing a total 2Ku aircraft count of more than 1,100, and a backlog of approximately 900 aircraft.

On the linefit front, before I start discussing the 737 MAX, I'd like to start by saying that our hearts go out to the families who lost relatives on Ethiopian Air 302 and Lion Air Flight 610. That said at Boeing for the 737 MAX, we're now operable for service bulletin installation. We're working through linefit qualification testing and we have customers signed up for the linefit delivery. At Airbus, where linefit on the A220 and are still on track to install our first A320's and A330 family linefit aircraft in 2020. We had three new airline model inductions for the quarter, the Virgin Australia A330-200, the British Airways B787-900 and the GOL B737-800 MAX.

Now, let me turn to the North American segment where we saw modest service revenue growth on the surface, but 12% service revenue growth if you exclude the headwind of the deinstalls and exclude the benefit of the software product revenue I discussed earlier. We expect the previously discussed competitive deinstall program to wind down this quarter, as the last 28 ATG aircraft are replaced with a competitive satellite system. The financial effect of that will create a remaining headwind for CA service revenue comparisons to Q2 next year. We saw one airline flip back to the turnkey model in the quarter from the airline directed model and we expect the second to flip as well. These flips will hurt equipment revenue this year, but help adjusted EBITDA in the future.

Now, I'll turn to CA Rest of World, our growth engine. We had a strong revenue growth in Rest of World with service revenue up 39% from a year ago and equipment revenue up 167% from a year ago. The equipment revenue jump is powered by the large number of installations we're making in new airline fleets. ARPA for ROW declined as a result of these new fleets because airlines are reluctant to begin marketing IFC until a substantial portion of the fleet is installed. This point is illustrated by the fact that in the first quarter 2018, 17% of the equivalent -- aircraft online in ROW were in new fleets. In the first quarter this year, 45% were in new fleets and by year end, we expect that to go to 55% being in new fleets. That backlog of new fleet installations creates a tremendous opportunity for growth as we look ahead to 2020. And we're starting to see some green shoots from that now. Gross ARPA for new fleets in Q1 was $73,000 for new fleets, up 28% from $57,000 in Q1 last year.

So in summary, we feel like we've gotten off to a really good start this year and are ready to take advantage of the opportunities in front of us. And with that, I'll turn it over to Barry.

Barry Rowan -- Executive Vice President and Chief Financial Officer

Thanks, Oak, and good morning everyone. Before reviewing our detailed operating results, I'd like to summarize our key financial accomplishments for the quarter. We've now completely refinanced our balance sheet. Strong operational execution is driving significantly improved financial results, including underlying service revenue growth and cost structure reductions. And our focus on aggressively managing working capital is releasing cash to the balance sheet as planned. Our outlook for the year continues to strengthen, prompting us to raise adjusted EBITDA guidance and adding greater conviction to achieving at least $100 million improvement in free cash flow over 2018.

I'll now review each of these achievements in greater detail. Late last year, we embarked on a two-step process to refinance our balance sheet beginning with refinancing $200 million of our convertible notes. As Oak described, Gogo's improving performance and great support from our debt investors enabled us to successfully complete the senior secured notes financing we recently announced. After initially closing our $905 million, we have the opportunity to place an additional $20 million priced above par with no consent fee, bringing the total amount of the senior secured notes to $925 million.

We've also launched the tender offer for the $162 million in convertible notes due in March 2020. These financings achieved several key objectives for the company. First, we extended the maturities on our debt. The previous earliest due date was March 2020. Excluding the 2020 convertible notes, which are the subject of a tender offer, 80% of our debt is now due in 2024. The recently issued 6% convertible notes are due in May of 2022, with the conversion price of $6 per share.

While we have the option to extend the maturity of the senior secured notes even further, we opted for a five-year term as the two-year non-call period puts us in a position to continue refinancing our balance sheet on better terms based on the accelerating financial performance we are projecting. It's worth noting that both the recently issued senior secured notes and the 6% convertible notes have been trading above par since closing the transaction.

The second key objective we achieved through these financings was that we reduced the interest rate on our senior secured debt from 12.5% to 9.875%. Third, we retained the flexibility to redeem a portion of our senior secured notes with proceeds of up to $150 million in strategic investments at a price of $103 anytime within the next 12 months.

Finally, we have provided for an additional liquidity buffer with an initial $30 million revolving line of credit facility and a provision to double this amount over time based on meeting certain financial ratios. With these financings now completed and based on our current plans and projected cash flow trajectory, we do not anticipate requiring additional capital except as needed to refinance our debt maturing in 2022 and 2024.

The strong operational execution Oak described is driving significantly improved financial results. Our 2Ku aircraft are performing well and the cost savings we targeted by the end of 2020 through our integrated business planning process are running ahead of plan. We're also seeing the benefit from our focus on cash management. Our cash position of $189 million at the end of the first quarter was well ahead of the plan we put in place last fall. During the first quarter, we achieved a $75 million improvement in free cash flow over the prior year. Approximately, 40% of this improvement was driven by higher adjusted EBITDA and another 40% from lower airborne equipment spend with the balance coming from improvements in networking capital. And leverage free cash flow has also improved substantially -- positive $11 million this quarter represents a significant turnaround from the negative $60 million in the year ago quarter. These achievements add to our confidence in achieving at least a $100 million improvement in free cash flow for 2019 versus 2018.

I'll now turn to our first quarter operating results beginning at the consolidated level. Total quarterly revenue of $200 million was at the high end of the preliminary estimated range of $197 million to $200 million (Technical Difficulty) total revenue declined. The primary reason for this decline is the comparison against the $45 million of equipment revenue recorded in the first quarter of 2018 resulting from one of our airline partners switching to the airline-directed model, which occurred in conjunction with the implementation of Accounting Standard 606. Excluding this impact, total revenue would have increased 7% from the prior year. Importantly, consolidated service revenues increased 9.5% year-over-year.

Adjusted EBITDA of $38 million was at the high end of our pre-announced range of $35 million to $38 million and meaningfully exceeded both internal and external expectations. As we noted in our pre-release on April 15, adjusted EBITDA benefited from $7 million in software product development revenue from one of our airline partners, stronger underlying CA service revenue, lower Satcom costs and $4 million in delayed operating expenses, which we now expect to incur in the second quarter. Even excluding the benefit of the software product development revenue and the delayed OpEx spending, adjusted EBITDA of $27 million represents Gogo's highest adjusted EBITDA on record. Regarding the quarterly profile of 2019 adjusted EBITDA, we suggest looking at this on a combined basis for the first and second quarters as Oak outlined.

Now, let's move to a discussion of the business segments starting with Business Aviation. After an exceptionally strong 2018, in which BA total revenue grew 21% and segment profit increased 41%. BA results moderated as expected in the first quarter for the reasons Oak explained. Total BA revenue grew about 2.5% from the prior year to $70.5 million and delivered yet another outstanding quarter of bottom line performance, segment profit margin of 47%.

On a year-over-year basis, service revenue grew nearly 12%, while equipment revenue declined about 18% or $3.8 million, as last year's results included the final recognition of revenue related to our sign and fly program. We expect total BA equipment revenue to decline in 2019 versus 2018 as last year's 34% growth rate also reflected the highly successful launch of the AVANCE L5 and L3 products. We do expect quarterly BA equipment revenue to be higher than this quarter's $17 million level and each of the remaining quarters of the year.

Totally ATG aircraft online grew over 11% in the first quarter, reaching 5,348 and ARPU grew about 1% year-over-year. We expect our ARPU growth to trend higher through the year with improving product mix. We continue to believe that total BA revenue will grow in the general range of 10% per year for the next several years. During 2019, we expect this increase to be largely driven by growth in recurring service revenue, as we realize the benefit of the significant number of AVANCE systems installed in 2018.

We also expect growth in BA segment profit in 2019. However, the growth rate will slow meaningfully from 2018's record 41% growth, which reflected significant operating leverage achieved during the year. We continue to expect the BA segment profit margin to be in the mid-40% range this year with significant free cash flow generation.

Now, I'll turn to a discussion of our Commercial Aviation division. Our combined Commercial Aviation business segments saw improving results, largely attributable to strong underlying service revenue from an overall increase in passenger usage and the impact of the cost savings initiatives, we put in place. It's worth noting that the CA results are impacted by two primary factors affecting the comparability of CAs results.

First is the impact of the deinstalling airline. This airline switched to the airline-directed model during the first quarter of 2018 resulting in the $45 million of equipment revenue I mentioned, which was recorded in the first quarter of 2018 and affects year-over-year comparability. In addition, the ATG aircraft deinstallations and changes in business terms are meaningfully impacting our financial performance this year.

The second factor affecting the comparability of the results for CA is the switch back to the turkey model from the airline-directed model by other airlines. One airline has already flipped back to the turnkey model this year and another is expected to do the same by the end of the year. As we've noted previously, an airline switching back to the turnkey model results in a decrease in equipment revenue, but is otherwise cash flow neutral to us.

CA first quarter total revenue was $96 million, representing a year-over-year decline from the $144 million level a year ago. This reflects the impact of the deinstalls we have discussed. In addition, this comparison is against the $45 million in equipment revenue recorded in the first quarter of 2018, I've also described. Importantly, CA-NA service revenue increased 4% to $92 million from the prior year. Excluding the impact of the deinstalling airline, CA-NA service revenue increased 22%. Service revenue increased 12% if you exclude the $6.8 million impact from the software product development revenue I mentioned previously.

We expect total CA-NA service revenue to reach a flat bottom in the second quarter of this year as the deinstallations are completed, and we expect it to resume growing next year after we get beyond the negative comps from the deinstalling airline. CA-NA net ARPA for the quarter was $126,000, up 23% from the prior year. Excluding the impact of the software product development revenue, net ARPA was $115,000 and grew 12% from a year ago. Take rates for the quarter reached an all-time high at 13.9%, up 32% from the prior year. This drove the strong service revenue growth as average revenue procession was just 12% lower versus the year ago period. This is encouraging data as it speaks to the underlying fundamentals of the business and reflects the positive effect of the increased capacity of 2Ku, as well as the benefit of third-party revenue.

As a result of the service revenue growth and the impact of our cost controls, CA's segment profit grew by $21 million versus the prior year to an all-time high of $23.5 million. Our cost initiatives drove a 29% reduction in total CA functional spend, excluding depreciation this quarter versus the prior year period, as these programs are tracking ahead of plan.

Looking at the quarterly profile of adjusted EBITDA for 2019, we expect most of the reduction from the first through the second quarter to come from our CA-NA division, as this segment was the primary beneficiary of the benefits affecting this quarter, which we've described.

Now let's discuss our Commercial Aviation Rest of World segment. CA-ROW total revenue of $33 million, was up 72% from the prior, reflecting revenue from the addition of 52 net incremental 2Ku aircraft. Service revenue grew 39% from the prior year. Take rates grew 12% over the prior year to 13.6% from 12.2%, and this is despite the anticipated net ARPA dilution from the substantial increase in the number of aircraft on new fleets versus a year ago as Oak described. The high quality global airlines we have won in recent years should drive higher take rates and ARPA as they are installed and season.

It's also helpful to look at the improvement in these ARPA trends over a longer period of time. CA-ROW ARPA declined 22% for the full year 2018 over the prior year as we brought on new fleets. For the full year 2019, we expect this rate of decline to be less than half of this level, and we expect overall ROW ARPA to begin increasing in 2020, which would be a meaningful achievement considering the number of new fleets being added.

Segment loss in CA-ROW improved about 15% from the prior year period to a $19.2 million loss, as we continued to see the benefits of more aircraft utilizing our global satellite network. This operating leverage is demonstrated in the progression of service gross margin, which excludes depreciation and amortization expense. Of course, this margin is negative in the early years of deployment with only a small number of aircraft utilizing the network. We've made significant strides in leveraging our network through the number of ROW aircraft wins we've achieved and are now deploying.

The negative service margin was cut by more than half in 2018 versus 2017, and it reached positive territory for the first time this quarter. For the full-year 2019, we expect to see a continuing reduction in segment losses from the peak level of 2017, as we spread Satcom and operating costs across a larger 2Ku fleet and benefit from the reduction and expenditures from major new programs.

I will now conclude with a discussion of our 2019 guidance. Our initial guidance for the year included the impact of one airline switching back to the turnkey model with a resulting reduction in equipment revenue. We now expect two airlines to flip back to the turnkey model before the end of 2019, one of which has already transitioned. However, based on the strength of the underlying CA service revenue and allowing that there may be some fluctuation between business segments, we are not changing our guidance range for consolidated revenue at this time.

Our updated guidance is as follows. Total revenue in the range of $800 million to $850 million unchanged. CA-NA revenue of $355 million to $380 million, no change from prior guidance with approximately 5% from equipment revenue. This is reduced from 10% we provided on our initial 2019 guidance and as a result of airlines changing from the airline-directed to the turnkey business model. We expect CA-ROW revenue of $135 million to $150 million with approximately 30% from equipment revenue. No change from prior guidance for either measure. BA revenue of $310 million to $320 million, again no change from prior guidance.

We are raising 2019 adjusted EBITDA guidance from the previous range of $75 million to $95 million to the higher and narrower range of $90 million to $105 million. This implies 37% adjusted EBITDA growth over 2018 at the midpoint of the range. Again, looking at the quarterly profile, we expect second quarter to be the lowest adjusted EBITDA quarter of the year.

Based on our improving cash flow expectations, we're changing the tone of our guidance from approximately to at least $100 million improvement in free cash flow over 2018. We continue to expect unlevered free cash flow to improve every quarter on a year-over-year basis during 2019, and for this metric to be in modestly positive territory for the full year. Our final guidance metric is an increase in 2Ku aircraft on line of 400 to 475, unchanged from prior guidance.

As I conclude our prepared remarks, I want to join Oak in thanking our customers, our investors, as well as our employees for their hard work and contributing to these strong results. Operator, we're now ready for our first question.

Questions and Answers:


(Operator Instructions) Our first question comes from the line of Philip Cusick with JP Morgan. Your line is open, please go ahead.

Philip Cusick -- JP Morgan -- Analyst

Hi, guys. Thanks. Minor distraction right at the right time. Let's start with the cost savings that have been helping CA quite a bit. Can you detail more for us on what you've done in the last year and how you see the opportunity not just this year, but going forward in cutting costs?

Oakley Thorne -- President, Chief Executive Officer and Director

Yeah, I mean it's a little hard to nail one thing, Phil, because the IBP plan had a 102 initiatives. I would guess two-thirds of them had a cost savings element to them and they ran across of the functional operations as well as the G&A function. So it's very broad-based.

Philip Cusick -- JP Morgan -- Analyst

And what about going forward? I'm sorry.

Barry Rowan -- Executive Vice President and Chief Financial Officer

To add to that Phil, I think if you look at this year as we've described a number of major projects had their primary investment that is largely -- is behind them, including things like number of FTCs we had to put in place for new airframes and the linefit programs, we're still investing in those but at a lower level. There were also some changes associated with the strategic direction, for example, as we shifted to more of a B2B as opposed to B2C consumer marketing approach, we were able to reduce some of the marketing expenses last year as an example. So going forward we'll see the benefits of those things as well as really tightening up operational -- all the operational processes as Oak mentioned.

Oakley Thorne -- President, Chief Executive Officer and Director

Yeah, everything. Barry just described were all part of the IBP plan. The other thing I would say, Phil, there's still some benefit to come from that next year, the 102 or so projects actually run through -- are supposed to run through second quarter 2020. So we'd expect some more cost savings coming out of those.

Philip Cusick -- JP Morgan -- Analyst

Okay. And in the past you've talked about some of the premier airlines that would be coming online in Rest of World during 2019. Can you talk about some of those airlines you bringing online and then give us an update on the RFP pace out there? Thanks.

Oakley Thorne -- President, Chief Executive Officer and Director

Well, one thing I'd say, these big international airlines are on wide-body fleets. They install a little slower because wide-body planes fly more. With domestic fleets it's a little easier to ramp up quickly because the planes are down every night then you can get out, whereas the wide-body fleets, they often are flying 16 hours a day. So it's harder to get them into majors to get the systems installed. Obviously they're also bigger, so the ramp is somewhat slower from the time you start installing fleets until you complete. But we're making good progress. I think, some of the fleets are getting further along and like the British Airways for instance is moving along at a pretty good pace right now. We have -- we are seeing some good success in international and in Australia, where on Virgin Australia, both international and domestic and they've moved a free model and their take rates have really taken off. It's encouraging to see relatively new airline ramp up pretty quickly. So there's some green shoots there.

What was the second part of your question?

Philip Cusick -- JP Morgan -- Analyst

Just talk about the RFPs that are out there.

Oakley Thorne -- President, Chief Executive Officer and Director

Yeah there are, I mean what we've seen in the last year or so is a much more deliberate decision making process on the part of the airlines. You know a lot of international airlines early on would say, OK, to supervise plane entertainment system on just by their ISC system or a lot of these sales were part of a linefit programs and they just sort of check the box, give me whoever you want, Boeing or Airbus for ISC. Now they've they've been disappointed enough by saying that they're getting much more deliberate in that decision-making process. So the processes are just taking longer.

In terms of the pace, I think there's a fair number of RFPs out there, there are not many in the United States, but there are a lot in the rest of the world. I don't think the pace has changed much from last year, and we're working on a lot. And we're hopeful that we're going to win some good ones.

Philip Cusick -- JP Morgan -- Analyst

Good. Thanks, guys.

Oakley Thorne -- President, Chief Executive Officer and Director

Thanks, Philip.


Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley. Your line is open. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thanks a lot. Good morning. Interesting discussion Oak on the Ku opportunities, I was struck at the satellite show there are lot of the LEO constellations are highlighting aero as one of their top target markets. And I was just wanted to think about your conversations with them and how you think LEO might increase your options, your cost profile, et cetera, is that something that's part of your near-term thought process? And then, we've got the airline switching back from airline-directed to turnkey, maybe just give us a little bit of insight into what's leading them to do that and as we go to free, how do you see this evolving more broadly on pricing and so forth? Thank you.

Oakley Thorne -- President, Chief Executive Officer and Director

So on LEOs, first of all, we are ready for them if they come in this case you have been at least our 2Ku antenna, because it doesn't have the mechanical gambled piece it would have to flip back and forth at a very rapid pace to handle LEOs coming quickly over the horizon, because of the flat panel design. We are ready for LEOs should they become economically viable and an important part of our constellation if you will. We are depending on LEOs though because I think there is a lot of legitimate questions about whether they get up, most of those revolve around funding. The LEOs that would get up first if the current progress proceeds, don't really have much dynamic capability. They tend to be blanketing the earth in a relatively even manner, which is really conducive to extreme mobility.

Our demand moves around the globe all day long at a pretty rapid pace. So we're looking to increase capacity utilization by being able to aim beams where we want them when we need them. So LEOs, some of the later designs you could handle that. They tell us that design does have more dynamic beams than say, some of the earlier ones. So we're not depending on LEOs, I think that's the answer to that piece, but we're ready for them should they emerge.

On the turnkey to AD issue, I think it's almost kind of a red alert, we're the only company that even has in the turnkey deals because we've been around so long and back in the old days, airlines didn't want to pay to put connectivity and so we had more of an arrangement where we installed it. We kind of leased the space if you will in return for a royalty and we marketed to the customer.

Today, generally now airlines consider this important enough that they want to take over the distribution and marketing of the product. Some airlines having done that realized there's a cost and don't necessarily like that cost. And so some of them are have asked to move back and we've moved one back and we probably will another. I don't think moving back is going to be a big trend either to be honest, I think it's always going to be a bit of a mix and that mix is going to depend on the size of the airline or profitability on their own distribution capabilities.

In terms of the move to free, we have -- one of the heroes of the airline industry is on our board, Bob Crandall. Bob says, one in, all in. So if somebody ends up going free, I think there's going to be a lot of pressure on other airlines to go free. I think that airlines which have a single provider are gonna be advantaged in that because they won't have to try and negotiate across multiple providers to get to free, I think that free will actually raise all boards in our industry. I think the industry is taking a liking over the last couple of years from a PR perspective that nobody was going to get profitable and it was a disaster. I would note that nobody's profitable in the ridesharing industry either, but people seem to think it's worth investing in.

Anyhow, I think that the free could be the tide that raises all boats except for the boats that have holes in the bottom. And I think that the companies that can ramp capacity, the quickest to satisfy their airline customers' demands will will be more successful as a result of free than others.

Simon Flannery -- Morgan Stanley -- Analyst

Any update on the next-gen ATG?

Oakley Thorne -- President, Chief Executive Officer and Director

As I said in my comments, we're working hard on that and we'll have more to say later. We should note a couple of things. This will be our fourth ATG network, as they say in the Farmers Insurance, we've learned a thing or two because we've seen a thing or two. Basically, we're at the point of deployment with our next-gen ATG system, the LTE 4G version that we've developed with ZTE. We had 10 towers installed. We had 50 other towers on their way to be installed and we were flying very successful test flights.

But I think we'd be foolish not to understand the risks in having a Chinese telco as a partner now sadly and we need to adapt to that. So we have been working -- frankly, we've been working on a next-gen version of something since 2011 and we had lots of different ideas for how to do it and we have lots of very smart engineers who've been thinking about it for a very long time. So at the time since the first ZTE issues cracked up last spring, we've been hard at work at looking at alternatives and we'll have more to say about our direct path to utilizing those alternatives hopefully in the not too distant future.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you.

William Davis -- Vice President of Investor Relations

Thanks, Simon.


Thank you. And our next question comes from the line of Rick Prentiss with Raymond James. Your line is open. Please go ahead.

Rick Prentiss -- Raymond James -- Analyst

Yeah, thanks. Couple of questions. Barry, you mentioned, you've been working aggressively on the working capital side, freeing up some cash also. How much cash do you think you need to traditionally run the balance sheet month-in, month-out, quarter-in, quarter out?

Barry Rowan -- Executive Vice President and Chief Financial Officer

Yeah, to the first part of that, Rick, Yes, we are working aggressively on that and it's driving the underlying process improvements, which is releasing cash through inventory and receivables management primarily. What I would say about the liquidity is that when you look at the projections that we have and including the tack on that we've done and $30 million in revolving ABL facility that came with this transaction. We expect that our liquidity position is going to be remain above $100 million when you include those things.

So our projections are to have a good cushion above the $100 million range, in terms of the amount of cash required to run the business, it's certainly below that level meaningfully. But we're comfortable with that liquidity position given our current plans and the cash flow trajectory that we're seeing going forward.

Rick Prentiss -- Raymond James -- Analyst

And Barry, you've mentioned I think hope you have in the past, the flexibility and the most recent senior note includes $150 million in case there is a strategic investment in the next 12 months. Help us understand one, why is that inserted in there? Is there something actively being worked on in that kind of time frame? And two, what should we think that type universe would be, is it a customer or is it a peer or is just strategic, is that a financial? How should we think about what to make up $150 million that you called out on the call?

Barry Rowan -- Executive Vice President and Chief Financial Officer

Sure. I mean this is a kind of an extension of the conversations that we had last fall as you know at that time, we have had some inbound about selling into one of the divisions or another for example, those relationships that we've developed through that process have been ongoing. I would say that the nature of the conversations has evolved from an outright sale of the division to something looks more like a strategic investment in the company that would likely come along in conjunction with some kind of a commercial arrangement.

So it's more of a strategic investment that would augment the business that would enable us to advance the business commercially as well as bring in some capital to the company. So, that amount is an amount that would be meaningful obviously to bring in a partner like that. And we wanted to have the flexibility where that to come in as a cash infusion to either pay down debt or add cash to the balance sheet. So being able to call it at $103 gave us that flexibility and our debt holders were very supportive of that idea as well.

Rick Prentiss -- Raymond James -- Analyst

And the timeline extends out beyond the 12 months, does it just mean that you put onto cash or you don't worry about the no call two side, I'm just wondering why the 12 months?

Oakley Thorne -- President, Chief Executive Officer and Director

Yeah, I think that the 12 months is for a couple of reasons, one is that those conversations remain ongoing and we will see if we get something done that's going to happen -- to probably happen in that period of time. And secondly, as with the shorter no-call period of two years, we get beyond that and the note -- the benefit of the $103 does come down as you get closer to the no call, which is I think as you get closer to the first call period which is at par (ph) plus half a coupon, so $104.5 or so. So that was around the rationale, including that period of time.

Rick Prentiss -- Raymond James -- Analyst

Thank you. Last one for me, take you back on Simon's question about the next-gen ATG, I know you've got more to say later, you're happy with your progress in making. Could you help us brain just within zip codes. What might be do we talking about as far as CapEx or OpEx or physical requirements as you look to roll that new solution out?

Oakley Thorne -- President, Chief Executive Officer and Director

I think, we're looking at maybe a little bit more than we had in the firm for our prior solution, but not dramatically different. And we'll give you more guidance on that down the road.

Rick Prentiss -- Raymond James -- Analyst

That's good. Some people are just nervous what are you talking about is it a big change out, so that helps to say a little more than the previous one, thanks.

Oakley Thorne -- President, Chief Executive Officer and Director

Thanks, Rick.


Thank you. And our next question comes from the line of Louie Dipalma with William Blair. Your line is open. Please go ahead.

Oakley Thorne -- President, Chief Executive Officer and Director

Hi, Louie.

Louie Dipalma -- William Blair -- Analyst

Good morning. Guys, with the debt refinancing, the deicing and the deinstalls now are nearly complete, there have been many references to free cash flow generation and being fully funded in the press release and in the scripted remarks. Do you anticipate being free cash flow break even next year, so for 2020 and for actual positive free cash flow generation the year after on a fully levered basis?

Barry Rowan -- Executive Vice President and Chief Financial Officer

Yeah, Louie, we haven't given specific guidance around that, but what I would say is that our outlook for free cash flow continues to improve. I Think your question around 2021, we do expect to be solidly free cash flow positive in 2021 and in 2020 approaching it. So when you look at the cash flow profile with liquidity that we have now with the improving EBITDA with the benefits of the cash management programs we're putting in place, all of those are contributing to that. So approaching in 2020, I wouldn't say we get all the way there, but then meaningful positive free cash flow generation in 2021.

Louie Dipalma -- William Blair -- Analyst

Sounds good, Barry. And for the full year of 2018, the international part of the commercial division improved segment EBITDA by roughly $12 million and it continued to show solid progress in the first quarter. And Oak, you noted that Virgin Australia is shifting to passenger free, which also seems to be a positive development. How should investors think of modeling the international segment as more aircraft come online and as they become more seasoned, it is like $12 million per year an improvement, a good number, or do you think it could increase beyond that for the next several years? I was just wondering how you guys are thinking about the improvements in that division?

Barry Rowan -- Executive Vice President and Chief Financial Officer

Sure. Let me first talk Louie about the drivers of the improvement, and then I can maybe frame the kind of the expectations there. There are really three primary drivers to improving the rest of world profitability. The first is increasing number of planes. So as we install that backlog that will certainly drive that and you're seeing that benefit now as we get better utilization of the network because you have to obviously have coverage and around the world and as we fly more aircraft, we can get better utilization of that coverage and then add capacity as it's required that turns into more of a variable cost as it's required over different parts of the world. So the first is the planes.

The second is the average revenue per aircraft. And as Oak described, we're seeing some real improvements there as we get these aircraft installed and expect that to continue as we outlined with the addition of these high quality fleets.

And then the third one is the cost structure. So there are some meaningful investments in getting started in rest of world and then in addition, we do see the opportunity to drive Satcom costs down even further. So the benefit does is from raw bandwidth cost as well as the utilization and for the reasons that Oak outlined and we see the significant technology advancements in satellite technology that we do see that's really helping probably beyond what we had expected when we were doing these plans last summer.

In terms of giving you some context for the the overall improvement in the burn for ROW. We said while back that we expected 2017 to be the peak year of investment in ROW and that has been the case you see it coming coming down to $95 million from over $100 million in from 2017 to 2018, and we would expect to see an improvement of that order magnitude this year. And then beyond that, it will really depend on kind of the ramp in the ARPA for those aircraft coming online because most of the -- at least the current backlog will be and so as you get out into those (inaudible).

But we're growing more optimistic I would say on the revenue opportunities there than we were going back to last summer for sure, I mean just to quantify that we had said going back to last summer that we were projecting for purposes of planning take rate that was in -- that was 12.6% in 2022, we're beyond that already. So our expectation for EBITDA generation, free cash flow generation has certainly improved from last summer significantly.

Louie Dipalma -- William Blair -- Analyst

Thanks a lot guys.

William Davis -- Vice President of Investor Relations

That was our last question. Thank you.

Oakley Thorne -- President, Chief Executive Officer and Director

All right, well thank you, everybody for attending our Q1 2019 earnings call. I'd like to leave you with just a few thoughts. First, we've got a really very strong cash flow generating business in DA, which has not only a unique competitive advantage by virtue of our own spectrum, but also has ample run rate for growth because BA is relatively unpenetrated. Second, rest of the world is growing. Its extremely large and unpenetrated market and with our global 2Ku platform, strong backlog, we think we're well positioned to win share -- win our share of the attractive long haul, a wide-body market.

Third, CA-NA will return to solid growth in 2020, as increasing take rates drive ARPA and strong free cash flow. Fourth, we strengthen our balance sheet, as we've noted and finally, by virtue of our industry-leading market shared scale, we really believe we're positioned to take advantage of the opportunities in front of us. We look forward to demonstrating that and talking to you about it in the quarters to come. Thank you very much.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 62 minutes

Call participants:

William Davis -- Vice President of Investor Relations

Oakley Thorne -- President, Chief Executive Officer and Director

Barry Rowan -- Executive Vice President and Chief Financial Officer

Philip Cusick -- JP Morgan -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Rick Prentiss -- Raymond James -- Analyst

Louie Dipalma -- William Blair -- Analyst

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