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Edited Transcript of ENT earnings conference call or presentation 19-Mar-20 12:00pm GMT

WESTLAKE VILLAGE Apr 10, 2020 (Thomson StreetEvents) — Edited Transcript of Global Eagle Entertainment Inc earnings conference call or presentation Thursday, March 19, 2020 at 12:00:00pm GMT

* Christian M. Mezger

Global Eagle Entertainment Inc. – CFO & Executive VP

Global Eagle Entertainment Inc. – CEO & Director

* Peter A. Lopez

Global Eagle Entertainment Inc. – VP of Finance and IR

Ladies and gentlemen, thank you for standing by. And welcome to the Global Eagle Entertainment’s Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today’s conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Peter Lopez, Vice President of Finance and Investor Relations. Thank you. Please go ahead, sir.

Peter A. Lopez, Global Eagle Entertainment Inc. – VP of Finance and IR [2]

Thank you, Shannon. Good morning. And welcome to Global Eagle’s earnings call for the fourth quarter and full year of 2019. I’m Peter Lopez, Global Eagle’s VP of Finance and Investor Relations.

Before we start, I would like to remind you that our discussion today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied in such forward-looking statements due to various factors that we disclosed in our earnings release issued earlier today as well as in our upcoming 2019 annual report on Form 10-K. We disclaim any obligation to update those statements whether as a result of new information, future events or otherwise.

Our discussion today will also reference EBITDA, adjusted EBITDA, net debt-to-adjusted EBITDA and free cash flow, which are non-GAAP financial measures. We have included a definition of these non-GAAP financial measures as well as a reconciliation to the most directly comparable GAAP financial measures in the earnings release and in the slide presentation accompanying this webcast.

Now I’d like to turn it over to Josh Marks, Chief Executive Officer of Global Eagle. Josh?

Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [3]

Thank you, Pete. Good morning, everyone, and thank you for joining our call today. Turning to Slide 3. Pete and I are joined by Christian Mezger, our CFO. And Christian and I are going to focus on 4 points today.

First, I’m going to update you on our strategic review of our Maritime, Enterprise & Government business, or MEG as we call it, as well as our joint venture interest. We’re keeping MEG as we believe the fastest path to deleverage is to continue the improvement in that business that we started in 2019. Scale and vertical market diversity are advantages in the current environment. And in parallel, we continue to work on the sale of our joint venture interest.

Second, I’m going to recap our 2019 business progress. We improved both earnings and cash flow, and we’re confident that as our customers ramp up after coronavirus, our solutions will be core to their services.

Third, we’re going to cover the revenue and cost model for our major business lines and, generally, how we are mitigating coronavirus impact. We are working around the clock with our customers and our suppliers to reduce cost while preserving flexibility. We’re not going to give specific guidance at this time because the situation is changing very rapidly.

And fourth, Christian is going to cover our 2019 financials, which demonstrate clear execution. Christian will also update you on our restructuring activities.

So turning to Slide 4. The travel industry has never seen concurrent challenges, like what we see now with coronavirus on top of the Boeing 737 MAX grounding. Last year, we mitigated the impact of the MAX, which reduced our service revenue. And now we are building on our cost control experience from last year to shift capacity in our network and conserve cash. Because we have teams in Hong Kong, we knew from early February, that the coronavirus impact was going to be significant. And we built work-from-home capabilities at that time that we have now rolled out company-wide.

On Slide 5, you can see our mission. We provide solutions that connect, entertain and inform passengers and remote workers. We enrich the time they spend in the air, at sea or at remote location with fast Internet, entertainment, and applications. And we serve the strongest, most valuable airlines and cruise lines in the world. Our customers are entering the coronavirus crisis from positions of strength. They have consumer brands and loyalty that will accelerate their ultimate recovery. So we need to weather the current storm with our customers, while preparing ourselves for the rebound that we hope will come this summer.

Turning to Slide 6. I now want to update you on our strategic initiatives. A year ago, we started the strategic review of MEG, evaluating the sale of some or all of the business. Since that time, we have executed on our operational plan. Last year, we renegotiated bandwidth contracts to reduce our satellite cost; we deployed new SD-WAN technologies that drive gigabit class throughput on passenger cruises with higher network efficiency; and we focused our commercial activity on cruise, yachts and government. We also targeted our capital investments. So MEG’s earnings generation and cash flow improved. And while we expect coronavirus to impact our cruise revenue through the summer, MEG’s long-term potential remains compelling. Our largest MEG competitors are in the midst of restructuring our M&A processes. And in these market conditions, having scale from both aviation and MEG in the same network is very important for optimization.

For example, as we respond to coronavirus, we can shift capacity between airlines, cruises, yachts, relief organizations, government agencies and even military operations. So with MEG’s improved performance and with a narrowing field of competitors, we concluded that keeping MEG was our fastest path to deleverage, diversification and scale.

Now in addition to MEG, we have been evaluating options for our joint venture, which provides cellular roaming services. Our JV partner has driven this process, which remains active. If a transaction closes, we anticipate using proceeds to pay down debt.

We’ll now review our business progress during 2019. And turning to Slide 7, we’ll start with in-flight connectivity, or IFC. So last year, we launched our new 3-axis antenna and high-speed modems, and we installed over half of our Air France fleet. We completed that 50 aircraft incremental order with a major IFC customer, and we won Turkish Airlines to install our connectivity on their Airbus A321 and Boeing 737 fleet. We had an outstanding year of installations, and we expect installation momentum to resume in late 2020 after 737 MAX production resumes and after airlines get back to normal post coronavirus. Our IFC strategy remains clear. We serve Boeing 737 and Airbus A320 aircraft in North America and EMEA. We bundle entertainment with connectivity to provide passengers with movies, TV, games, content and broadband Internet. And let me reiterate why we focus on the 737 and A320. First, they are and remain the largest available pool of candidate aircraft. We estimate there are over 11,000 single-aisle aircraft that are not currently committed to an IFC program. About half of those are in service now, and the other half will be delivered by 2024.

Second, these aircraft types stay within specific geographies with limited flight route variability. So we could be very efficient where we provision capacity. And as you know, we use capacity from multiple operators, and we don’t risk our aviation operation on a closed network with single satellite dependency. Our large fleet all operate within an arc from North America to the Middle East, and that’s where our new installation will also occur. We expect to leverage infrastructure that we’ve already built and bandwidth is largely already provisioned. So Turkish Airlines is a great fit. They need high performance between Africa, Russia and near Eastern Europe. And our network is uniquely capable of serving them.

In addition, the areas where we have the highest in-flight connectivity utilization are increasingly the areas of highest demand for our maritime and government applications. At the year-end of 2019, we had a total of 1,028 installed satellite connected aircraft. Now this includes 83 Boeing 737 MAX aircraft that were grounded. Note that we eliminated 81 wireless IFE and IFC aircraft from Jet Airways and Aviana Brasil from our 2019 count. Several of these aircraft have now been placed with new operators, and we’re in commercial discussions to reactivate service. Average revenue per aircraft during 2019 was steady at approximately $120,000 per year per aircraft.

We expect coronavirus will change installation schedules this year. Some of the remaining Air France installations will defer into 2021. But at this time, Turkish Airlines still expects installations to commence later this year, ramping up in 2021.

Turning to MEG. We saw strong year-over-year growth in cruise, where our Wi-Fi and TV services are thriving. At year-end, we had 60 cruise ships with only connectivity, 56 cruise ships with both connectivity and television services, and 176 ships with only television services. Cruise revenue was $17.7 million in the fourth quarter, up $2.1 million sequentially and $2.7 million year-over-year. In addition, we had 206 contracted yachts at year-end, of which 159 were active, and we renewed over 95% of our yacht contract during 2019. Towards year-end, consistent with our seasonal expectations, we did see yachts taken from active service for maintenance or sale. And finally, we have 3,275 land sites at year-end.

And finally, for Media & Content, we finished 2019 with our cloud content platform open in operation. We’ve on-boarded audio, movie, television, movie trailers and music videos onto the open platform, integrating with third-party data sources and our in-house pulse analytics platform. We have loaded about 60,000 media titles into the system, and we’ve delivered about 300,000 media assets to airlines. And while we’ve successfully onboarded our major airlines to open, during 2020, we expect to move the rest of those customers across to the platform. We will use any downtime from coronavirus to accelerate this transition.

During 2019, we saw our CSP business grow while we reduced our cash inefficient third-party distribution business. Our major new CSP accounts in Asia Pacific, the Middle East and North America drove our growth. We have focused our in-house distributors on premium content. While year-over-year, our third-party distribution revenue decreased to $22.7 million in 2019 from $33.5 million in 2018, we actually increased the quality of our titles, which translates to better cash flow. In fact, we will benefit in 2020 from distribution right for 3 Oscar-winning films. Parasite, Judy and 1917, held by our emphasis and entertainment in motion subsidiaries. These properties differentiate our CSP services for airlines. And help us mitigate the increasing cost of blockbuster content and manage a potentially weaker slate later this year as studios delay new releases until theaters reopen this fall.

So turning to Slide 8. In the absence of coronavirus, we would have capitalized on our commercial and cost momentum during 2020. So how does coronavirus change this outlook? As I said earlier, we’re not going to give guidance at this time as the situation is just too fluid. However, I do want to give you a general idea of what business lines are impacted and how we’re responding.

So first, which of our vertical markets are impacted by coronavirus? So the impact is negative for airlines and for cruise lines, where traveler demand is severely depressed. It’s neutral to positive in yachts. It’s likely positive for our relief agency and government businesses. And it’s unclear at this time how commercial shipping and energy will be impacted, which obviously depend on resumptions of global supply chain, and energy price recovery, respectively.

Starting with airlines. We expect passenger demand to be severely impacted into July. For Media & Content, airlines are cutting flight schedules. And in response, we are cutting the volume of content that we acquire.

In 2019, our Media & Content revenue was $311 million. Now of that $311 million, 35% was based on fixed-revenue contracts that are independent of flight volume, while the remaining 65% was variable based on flight segments operated. Now while 65% of our revenue is variable, about 90% of our content purchasing is variable. Therefore, we do have flexibility to work with our airline and with our studios to adapt programming in ways that reduce what airlines pay, create new opportunities for our partner studios and help support our margin dollars. We certainly will be leveraging our in-house distribution capabilities and our global content purchasing scale to find win-win solutions with our airlines. So at this time, we see more coronavirus risk to revenue than to gross margin in Media & Content.

Turning to in-flight connectivity. Over 95% of our IFC service revenue comes from monthly subscriptions with airlines. Airlines pay us regardless of flight segments operated or passengers flown with very limited out to reduce those fees for government-mandated grounding. This is a different revenue model from our largest competitors who bill the airline per passenger session or bill the passenger directly. Now our cost structure was already leaner than our competitors due to our actions from the MAX grounding. We had maintained maximum flexibility into 2020 to adjust our satellite capacity as the MAX recovery timing was unknown. So as we sort through the impact of temporary flight suspensions from coronavirus, we will work with our customers to pass through savings as we shift or cancel bandwidth commitment.

As of today, we have yet to sign contracts for about 20% of our bandwidth requirements this year, mainly in Maritime. That gives us some near-time — near-term flexibility to shift our network depending on what happens in in-flight connectivity. We also await indication about how federal financial support might benefit the aviation industry supply chain.

Now in addition, we expect that aviation equipment installation will be delayed and deferred into the second half of the year. Our customers are currently furloughing maintenance teams that would otherwise have installed antennas. Similarly, we expect our supply chain of antennas, radios and other components will be impacted. But because MAX production stopped in July, we are carrying slightly more inventory than normal. So we do have reasonable ability to absorb this supplier disruption, at least into the second half of this year.

Finally, in our MEG business, we’re seeing a mixed bag. In cruise, passengers are mostly off ships by now, but crews remain on board. Cruise lines will use the downtime to maintain ships and prepare for the summer season. So we expect bandwidth requirements to go down, but not stop. The situation here is very fluid now, as our customers are rescheduling cruises and reprioritizing. I want to note that approximately 85% of our cruise line revenue, including both TV and Wi-Fi services, comes from monthly recurring charge contracts. While the remainder of 15% comes from revenue share activities with passengers and from temporary bandwidth upgrades.

Having cruise ships and yachts in the same portfolio does help us. We expect the yacht requirements to increase as owners spend more time away from shore, and we plan to shift network capacity to serve these yachts. We expect neutral impact from coronavirus on commercial shipping, energy and enterprise, as I mentioned earlier, and we expect some upside to our U.S. government and U.N. relief operations this year. Also, we do expect that our joint venture EBITDA will be impacted. Though with deferral of capital expenditures and a healthy cash balance held by the JV, the distributions that would benefit our liquidity may not be significantly impacted. So clearly, we must mitigate coronavirus impact through spend reductions and liquidity management. We expect to reduce satellite bandwidth and content spend. We are retiming the inventory deliveries as we deplete inventories on hand. And we expect to further reduce our capital expenditures.

We expect we will see significant operating expense reduction in travel and entertainment, in sales and marketing and professional services. And we will also accelerate our Phase 3 action using downtime from coronavirus to accelerate these transitions. So by the fourth quarter, we should see these benefits flow through to earnings and cash flows.

Now we will come back to you with an updated view of coronavirus impact once the dust settles on flight schedule, government bailout funds and arrangements with our content and bandwidth customers and suppliers.

Now in the meantime, having drawn our revolver in full, we believe we have adequate cash to weather the storm. Of course, we are also highly concerned about our employees and their health. We’re in a work-from-home configuration, which is working well so far. I am proud of how our teams have stepped up to address this event.

I’d now like to turn the call over to Christian to cover our 2019 financial results.

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Christian M. Mezger, Global Eagle Entertainment Inc. – CFO & Executive VP [4]

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Thank you, Josh, and good morning, everyone. Let’s turn to Slide 11. Before I discuss our financials for the fourth quarter and full year of 2019, I want to provide the key takeaways for the year. First, in the fourth quarter, we delivered another quarter where we met our operational and financial goals. We continued our strong year-over-year improvement in both earnings and cash flow.

Second, we continue to demonstrate our ability to improve cash generation and manage liquidity. Excluding the change in working capital, our fourth quarter free cash flow was breakeven, exactly at where we wanted it to be. And we accomplished this without the MAX returning to service as the full benefits of Phase 2 actions were realized.

Third, we made real progress in the remediation of material weaknesses, remediating another 4 during the year. And fourth, our Phase 3 actions are on the way, with savings in cost of goods sold and operating expenses.

Let’s turn to Slides 12 and 13 to discuss our financial performance for the fourth quarter and full year 2019. Global Eagle reported fourth quarter 2019 revenue of $162.9 million and full year 2019 revenue of $656.9 million. As in prior quarters, we did not include any connectivity service revenue for the Boeing 737 MAX in the fourth quarter. So last year, only the first quarter recognized MAX service revenues.

Our adjusted EBITDA was $24.6 million during the fourth quarter and $91.2 million during the full year of 2019 compared to $17 million and $73.1 million during the same periods of 2018.

Turning to free cash flow. Our cash flow from operating activities was negative $0.9 million for the fourth quarter, and capital expenditures were approximately $2.5 million. Therefore, including working capital, our free cash flow was negative $3.4 million. And now excluding the working capital used during the fourth quarter of more than $3.3 million, our free cash flow was essentially breakeven.

For the full year 2019, our cash flow from operating activities was minus $8.9 million, an improvement of $65.2 million versus the prior year. Capital expenditures for the full year were $20.2 million versus 2018 capital expenditures of $43.5 million which included certain network-related growth investments. Free cash flow, including working capital changes, was negative $29.2 million in 2019 versus minus $117.6 million in 2018.

Our fourth quarter 2019 cash flows demonstrate our successful turnaround during 2019 as we curtail cash burn.

Turning to gross margins. Our gross margin for the fourth quarter was 18.1%, up 4.6 percentage points over the prior year fourth quarter, driven by the improvement in connective gross margin. Year-over-year, connectivity gross margin improved in both in-flight connectivity and MEG. The improvement was driven by the activation of additional aircraft on the company’s network, growth in services to cruise markets and improved management of network costs. The full year 2019 gross margin was 20.3%, down 50 basis points from 2018. Our company gross margin declined in 2019, driven by a change in product mix in our Media & Content segment.

Operating expenses in the fourth quarter were $43.9 million, down 15.3% year-over-year. Operating expenses benefited from the full implementation of our Phase 2 cost savings initiatives in the fourth quarter. We continue to demonstrate progress in reducing operating expenses and sequential reductions each quarter this year have been adjusted for the onetime legal items that we discussed during our third quarter webcast.

For the full year 2019, operating expenses were $197.9 million, a decline of $46.6 million versus full year 2018. By the fourth quarter, we had fully executed our Phase 2 operational improvements and savings, realizing more than $50 million of annualized benefits. EBITDA before adjustments was $8.9 million for the fourth quarter and $31.1 million for the full year EBITDA before adjustments. We delivered on our adjusted EBITDA targets for the fourth quarter, showing continued and significant improvement year-over-year.

Adjusted EBITDA for the fourth quarter was up 44.7% to $24.6 million or 15.1% of revenue, a 450 basis points improvement over the prior year period. If we annualize the second half of 2019, our annual run rate of adjusted EBITDA was $100 million. Full year 2019 adjusted EBITDA was $91.2 million, an $18.1 million or 24.7% improvement over 2018.

Finally, our net loss for the fourth quarter of 2019 was negative $36.1 million or earnings per share of minus $0.39. This includes $89.7 million of accrued interest expense. Our improvement of adjusted EBITDA, combined with our breakeven cash flow, adjusted for working capital are our focus through 2019 of cost containment, and our contingent transformation and integration has set a solid foundation for 2020.

Let’s now cover our segment results. Let’s start as usual with the Connectivity segment. Connectivity revenues increased to $87 million in the fourth quarter or 3.3% year-over-year growth. For the full year, our Connectivity revenues increased to $345.8 million in 2019 versus $331.7 million in 2018. Connectivity gross margins were 15.9% in the fourth quarter, showing year-over-year improvement of 14.9 percentage points. We continue to believe that our Connectivity gross margins on a normalized basis will move towards 25%. Clearly, the MAX’s return to service remains an important driver of generating cash flow to delever the business. Our primary Boeing 737 MAX customers are Southwest, flydubai and LOT Polish.

During the first quarter of 2020, Boeing suspended production of the 737 MAX. This will impact our revenue and EBITDA in the first quarter of 2020. We are currently carrying an additional quarter of inventory valued at approximately $4 million. While this negatively impacted the first quarter, it may help us navigate coronavirus-related supply chain disruption in the near term. We expect inventory levels to normalize approximately 1/4 after the 737 MAX resumes production, which likely depends on when the impact of coronavirus begins to abate. We expect lower equipment revenue while MAX production is suspended on the order of 10 to 15 fewer installations per quarter or $4 million to $5 million impact to quarterly revenue, an approximately $1 million EBITDA impact per quarter. But we do expect installations to accelerate once production resumes. So we expect equipment revenue to be back-loaded during 2020.

Turning to our MEG business. As Josh covered, we made the strategic decision to retain the business and deepen integration with our aviation connectivity business. A major driver of this decision was the improved performance, measured in both earnings and cash flow generation of the MEG business during the course of 2019 in addition to the ability of acquirers to finance a transaction.

Cruise revenue in the fourth quarter was $18.6 million, an increase of $2.8 million year-over-year. As in the fourth quarter, a full year has passed since we reset our cruise contracts. Revenue in the fourth quarter grew 18% year-over-year. For the full year 2019, gross revenue was $69.9 million.

In Q4, yacht revenue was $4.6 million, in line with our seasonality expectations. Commercial shipping and energy revenue was $5.6 million in the quarter, and these verticals continue to perform well with improving unit revenue and profitability.

Turning to our Enterprise business. Fourth quarter revenue was $9.8 million as we continue our wind down of the legacy enterprise businesses. Our government business was $4.1 million in the fourth quarter, a business that continues to exhibit nice growth for us.

Finally, let’s cover our Media & Content segment. Fourth quarter revenue was $75.9 million, a decrease of $0.5 million versus the same period of 2018. As we guided in our third quarter call, our second and fourth quarters are seasonally lower than the first and third quarters during the timing of our customer delivery cycles. Gross margin for our Media & Content business in the fourth quarter was 20.5%, declining year-over-year due to changes of our product mix and seasonality, as mentioned earlier.

Let’s turn now to Slide 14 and cover operating expenses, which we improved $46.6 million year-over-year.

We reduced our labor, professional services and our travel and entertainment expenses throughout the full year. There is just a significant sequential improvement quarter-over-quarter through 2019, and we continue to optimize our cost structure from Phase 3 initiatives. As already discussed last quarter, we are deepening the integration of our business teams, simplifying workflows and automating various functions in the business. We have appointed cross-functional teams to drive multiple initiatives around the company, focusing on using data analytics to drive spend optimization in both content and connectivity. Based on our strong IoT backlog and new content technologies, we’re improving our supply chain activities to capture margin opportunities while improving customer value. We’ve identified substantial new opportunities to reduce cost while improving our product delivery, including moving operational roles to our customers around the world. [Phase 3] is well underway. We expect in-year 2020 benefits of more than $10 million, in which 60% is related to COGS and 40% related to OpEx. We expect these Phase 3 benefits to build quarterly through the year. However, given the coronavirus situation, we expect to accelerate these actions.

We finished 2019 with $61 million in total liquidity. We have $24 million in cash at year-end, with the remainder available to draw on our revolver. On February 28, in face of the coronavirus prices, we fully drew available funds on our revolver out of abundance of caution. As of yesterday, our cash balance was about $57 million versus year-end liquidity of $61 million.

Let’s turn to Slide 15. To summarize, we continue to deliver on our operational and financial objectives in the midst of compound challenges. We achieved our adjusted EBITDA guidance and breakeven free cash flow, adjusted for working capital. We continue to make sequential improvements in both gross margin and operating expenses. While the coronavirus represents significant challenges, we entered this period from a position of relative strength, in a far better position to weather this crisis than we would have been a year ago. Throughout our financial transformation, we continue to deliver on our operational promises to customers, building solid relationships with Blue Chip Airlines, cruise lines, global enterprises and government agencies. They will fuel our recovery later this year. As always, I want to thank our employees for their incredible work, which led to very solid results in the fourth quarter of 2019.

With that, I’d like to turn it back to Josh.

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [5]

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Thank you, Christian. I want to reiterate that while the coronavirus has created a true black swan event, an unanticipated, once-in-a-generation event, that threatens the travel industry and its suppliers, we are well positioned to weather the storm. We did real heavy lifting in 2019 that improved our cash flow, grew our earnings, and started to deleverage our business. And as an organization, we built the teamwork an aggressive posture that we needed to take action quickly.

Second, last year, we deepened our relationships with financially solid brand name airlines, cruise lines, enterprises and government agencies worldwide. Our customers will survive this crisis. And when they resume full operations, our entertainment and connectivity will be core to their passenger experience.

And third, our global scale and breadth of vertical markets helps us in this environment. While our airlines and cruise lines are under pressure, we’re seeing new opportunities in yachts and government markets. Provisioning a connectivity network to serve multiple verticals allows us to shift capacity from airlines to yachts or from cruise ships to governments based on demand, and it gives us the flexibility to reduce our network bandwidth spend as needed. It insulates us against the full impact of coronavirus in any one sector.

So we remain focused on managing liquidity, on partnering with our customers and our suppliers, and on driving cost efficiencies to maintain our operating margins and especially our cash flow.

With that, I’ll turn the call back to Pete for Q&A.

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Peter A. Lopez, Global Eagle Entertainment Inc. – VP of Finance and IR [6]

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Thank you, Josh. Shannon, let’s open up the Q&A, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rich Valera from Needham & Company.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [2]

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Question on the content business. You mentioned that 65% of that revenue is variable. Can you give us what your — how you’re thinking about that business over the near term? How much of that 65% do you think kind of goes away due to what’s happening right now with COVID? Just any color there would be helpful.

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [3]

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Sure. I’d be happy to do that. Thank you, Rich. So as I mentioned, 65% of our Media & Content revenue is variable, but 90% of our Media & Content COGS, our content acquisition, is variable. So we have more flexibility to reduce the spend on the back end than our customers have variability on the front end. And this is critically important because it opens up opportunities to work with our customers and with our studios to leverage our in-house distribution capability and our preferred studio deal to really drive the right level of spend for our airlines while maintaining our margins.

Now what we’re seeing from our airlines in Media & Content falls into 2 different categories. On one hand, we’re seeing airlines just requesting to keep content onboard aircraft for another cycle or 2, okay? So what’s on the aircraft now will stay on the aircraft into the summer. Now from our perspective, while we lose a little bit of lab services and technical revenue on it, the core licensing revenue that makes up the bulk of our CSP business continues in that scenario. So that’s not a death sentence for us. That just means that we continue to serve our customers with the content on board.

The second category are airlines that are under very significant pressure, right? Effectively putting their fleet on the ground for the next couple of months. And in those cases, we’re working with them to reshape what content they use across their network to reduce their spend, but to leverage our in-house distribution capabilities and change the mix of content on those planes to preserve our margin dollars as we go through. So we feel like the breadth and the scale that we have, being by far the majority player in the content services business, gives us some unique ways to work with our airlines and with our studios to adapt to that lower revenue environment while still maintaining margin dollars on our side.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [4]

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Got it. That’s very helpful. And then on the Connectivity side, it sounds like you have a lot more kind of contracted, committed revenue there, the 95% number. I’m just curious, how much sort of wiggle room do you feel though your customers have there, or might you grant them, particularly for the airlines that are, as you noted, really under duress. What kind of relief might you look to give them, given the extraordinary circumstances?

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [5]

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Yes. Let me start by pointing out again that 95% of our revenue in our in-flight connectivity business is on what we call a monthly recurring charge model, MRC. And that business model is very different from how our competitors work. Or if you look at our average revenue per aircraft, it can be a little bit lower than our competitors, but we don’t have the downside risk. So as we look at the current environment, there are very limited exceptions by our customers contractually to avoid that MRC.

Now are we going to be good partners? Of course, right? We are going to look at ways that we can work with our airlines and IFC to reduce the amount of bandwidth that’s required to look at how we can work with them on the product and the offer for the aircraft that are flying, how we can continue to be ready to spool back up when aircraft return to service. We will do that with our customers because we are good partners and because we are very clear that the future of our business and in-flight connectivity fits with our execution and program management with these largest airlines that we serve.

So we do obviously see the potential over the next month. On one hand, that airlines are going to put aircraft on the ground, and that, that may impact our — the request that come from airlines to work with us, even if it doesn’t trigger a contractual right. On the other hand, we’re waiting to see what the structure of any government bailout funds may look like, and we expect that the packaging of the government bailout will take into account the broader supply chain in the aviation industry.

So until we settle on those 2 things, it’s hard for me to give you a precise answer as to what it means. So we start from a contractual structure where the vast majority of the revenue in IFC is under contractual structures, contractual rights that favor us in this kind of environment. But again, we want to be good partners for our airlines. We want to work with them, given the extraordinary circumstances that we’re all under.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [6]

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Got it. That’s very helpful. And one last one, probably for you, Christian. I think you gave us the update on where your current cash stands. I think it’s $57 million. Just wondering how you’re thinking about kind of the arc of your cash position as the year progresses. And what do you view as kind of the minimum amount of cash you should have on the balance sheet to run the business?

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Christian M. Mezger, Global Eagle Entertainment Inc. – CFO & Executive VP [7]

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Yes. Look, I think, similar like — it’s hard for us to give a guidance and roll out liquidity going forward. I think I can tell you, we, on purpose, put in where we are sitting to date. You see that the business is with very little variation, very stable from a liquidity perspective, right? We look at this very carefully. We look at this from both the side on how we pay our vendors, but also that our customers continue to be. So this is a core focus, and that is how we manage liquidity today. But it’s hard yet to say how this will evolve. In general, you’ll see cash flow fluctuate depending on the revenue variation that we see in the Media & Content business.

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Operator [8]

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Our next question comes from Greg Gibas with Northland Securities.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division – VP & Senior Research Analyst [9]

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First, from a high level, what percentage of your overall or combined business is set at those contracted rates? And maybe what percent is more usage-based that’s kind of exposed to that decreased global travel? And then I guess, secondly is, can you attempt to quantify, I guess, the level of variable costs that you are targeting to, I guess, temporarily reduce?

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [10]

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Thanks, Greg. I think — let me start off with some basic metrics that will help frame that answer for you. So about 85% of our revenue comes from airlines and cruises. And of that 85% of our total revenue, about 50% of that is Media & Content, which is almost exclusively airlines, 25% is in-flight connectivity and 10% is cruise, okay? So let’s take the Media & Content block to start off with.

As I said earlier, about 65% of our revenue in Media & Content is built on contracts that are per flight segment-based, right? Where the licensing fee that we charge, the services that we offer are targeted against the volume, general volume of flight, the number of aircraft, that a given airline operates. Now I just said earlier, we have more flexibility on the provisioning side, that more of our cost structure is variable than our revenue structure. So as we work through the dynamics of how to manage a reduction in-flight frequencies, we can use the purchasing scale and the relationships that we have on the back end of provisioning in order to adapt to that environment.

On the in-flight connectivity side, we have flexibility in our network. So to give you a couple of data points. This year, we’ll spend, give or take, about $100 million on satellite bandwidth. And of that $100 million on satellite bandwidth, roughly 20% of that right now is either traffic that we can terminate or capacity which we expect to use this year, but have not yet signed a contract on. So as we look at how bandwidth will be required across our network with airlines and cruise having fewer passengers on board, but potentially seeing increases in our release agencies, in U.N work, in our government business, in our yacht segment, right, we are going to need to work with our satellite operators to ship that capacity. And I do believe that there are some good win-win opportunities to reduce our network spend on one side, but also help our satellite operators use capacity that may be coming available from other customers in order to serve the market and the unique customer relationships that we have at Global Eagle.

So when you think about sort of the overall variability of the network, it is both a function of how much of our cost structure is variable as well as how we can use what is on the Media & Content side, the scale economics of being the largest content service provider in the world. And on the satellite connectivity side, being a diversified integrator across multiple verticals, across mobility verticals like aviation and cruise, and against terrestrial verticals like enterprise or NGO, all of which have very different dynamics in the current environment. So as we look through kind of what that means for how we manage the cost structure on the back end, we have to be on top of what our customers need, right? Both positive and negative in the current corona environment. And that we need to move very quickly in these key relationships with suppliers to make sure that we can target our spend and their capacity, their content, into the right applications going forward so that we don’t get caught in the middle of that, and it’s still a win-win for our customers and our suppliers at the same time. I hope that gives you some color as to how we’re thinking about it.

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Christian M. Mezger, Global Eagle Entertainment Inc. – CFO & Executive VP [11]

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And let me add to that from a cost perspective. Look, I think as you’ve seen in 2019, the company made a lot of progress when it comes to the cost structure. Not only absolute amount, but I think variabilizing our cost structure was critical, right? So now you’re going to go into Phase 3. And that’s going to go and we further reduce operating expenses, right? And I think that is, to the earlier question from Rich as well, to maintain sufficient liquidity, right? And I think we have shown a good track record, executing plans, and we’re in implementation mode of Phase 3.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division – VP & Senior Research Analyst [12]

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Got it. That’s extremely helpful, guys. And then secondly, what range now are you targeting with respect to total IFC installations this year? And maybe how does that break down between Turkish, Air France and then other customers?

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [13]

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That’s a difficult question to answer. As we said earlier this morning, we do expect installations to be heavily back-loaded at the end of this year, as well as some installations we would have had this year will shift into early 2021. That’s just the sort of practical reality of a closed 737 MAX production line, combined with the fact that airlines are furloughing maintenance teams that otherwise would be retrofitting our equipment onto aircraft. The challenging part of that answer is, we still are working through what that means for when our equipment is actually sold and shipped to airlines. So if we’re looking at what the possible change in equipment revenue is for this year, at this point, we’re not seeing significant change on that. It really does depend on when the MAX production line resumes. And as Christian said earlier, we do have inventory on-hand in order to support that ramp-up, even if we do see some minor disruption from our supply chain due to coronavirus.

As we look at sort of the tempo of how airlines come back from the coronavirus crisis, and again, I do expect the V-shaped recovery here. I think business demand is going to be incredibly pent-up coming out of this, where we’re going to see a surge of airlines putting capacity back in this summer. I think we’ll have to work through the retrofit schedules on aircraft.

Now to answer your question about Air France and Turkish, in particular. With Air France, they’ve previously expressed the desire to use any downtime to try to catch up on retrofits and complete Wi-Fi installation. I think realistically, that may pick up again midyear. We have about 1/3 of the fleet still to go in terms of installations, and I see that as occurring in the back half of this year.

With Turkish, we’re still in the engineering phase, configuring the ship sets for their aircraft types. It is a complex program because it involves both the 737 and the A320 family aircraft. At this time, we don’t see an indication that the timetable there is slipping. Obviously, if we get into a very prolonged impact from coronavirus, that could have an impact. But we still target first installation in the second half of this year with a real ramp-up starting towards the end of the year.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division – VP & Senior Research Analyst [14]

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Very helpful. And then I guess the last one from me would just be, is it safe to assume that talks on the strategic sale of the JV at this point have been slowing as a result of COVID? And maybe when should we expect an update there?

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [15]

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To be clear, we’re not the ones running that sale process. Our joint venture partner is doing it, working with their financial advisers. We believe that in the current environment, we’re all assessing kind of what this means in the very near term. But when you look towards the summer and beyond, the cruise lines will be getting back to normal. So it’s really too early to tell if we’re going to see a real delay on that. Has it slipped to the right a little longer than we would have liked? Yes, and that’s understandable in the current environment. But we don’t see it as being fatal to the process.

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Operator [16]

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(Operator Instructions) Our next question comes from Mary Kirby with RGN.

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Mary Kirby;Runway Girl Network;Founder, [17]

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Early this week, Universal announced it’s going to make movies available on demand at home in the same day they are released in theaters due to the change in consumer behavior as coronavirus spreads. Of course, it’s certainly plausible that other studios will follow suit. Given that Hollywood has traditionally disallowed the streaming of early window movie content to passengers on devices, is Global Eagle planning for the possibility that COVID-19 might change the game for IFC when air travel resumes? And how might that impact globally go, whether the wireless business or the embedded IV content business?

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Joshua Benegal Marks, Global Eagle Entertainment Inc. – CEO & Director [18]

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Thanks, Mary. It’s a great question. So I see the potential impact of these decisions hitting the Media & Content business. And frankly, it’s too early to tell whether this is sort of net positive or negative. My gut is it’s probably net positive. But the stratification of release windows has been in place for a long time. And I think we’re starting to see between shift in studio strategies around their own proprietary streaming services. We’re starting to see changes in how studios approach theatrical windows. All of that creates opportunities to partner with airlines with new release content even earlier in the release cycle.

So as we look at our brands, our airlines that we serve, these are fantastic venues to put movies out at a very early stage in order to get traction of word of mouth. You want the exposure that our airlines bring in terms of premium passengers onboard, mass market exposure for these new titles.

So the studios, I think, have needed some reinvention of business model. And as they start rethinking release windows, it creates opportunities for us to use the premium brands that we serve, to work with them to help actually the earlier promotional phases of these movie releases, to get these movies out in front of more people and build word of mouth.

Now at the same time, we also recognize that in a world of streaming services, we need differentiation in our content. We’re going to have the traditional Hollywood content on aircraft. That’s going to happen now and in the future. But it’s up to us to continue to be innovative about how we source content. And if you look at what content property we’ve been acquiring properties like Parasite and 1917 and Judy, right? We’re making the right bets there. And I think that the dynamic changes that we’re seeing on the studio side create opportunities for players like us that understand the aviation audience onboard have the sufficient sophistication to be able to know what content to acquire and are disciplined about how we do it. Those have been sort of the 3 areas of focus for us now. And I think as studios start to rethink their distribution plan, it creates some real opportunities for us to partner with them and with our airlines in interesting new ways.

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Operator [19]

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And I’m currently showing no further questions at this time. I’d like to turn the call back over to Peter Lopez for closing remarks.

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Peter A. Lopez, Global Eagle Entertainment Inc. – VP of Finance and IR [20]

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Thank you, Shannon, and thank you all for participating on our fourth quarter and full year 2019 earnings call. We look forward to updating you on our continued progress. Shannon?

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Operator [21]

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

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