Gogo Inc. (GOGO) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Gogo Inc. First Quarter 2017 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, this conference call is being recorded. I would now like to turn the conference over to Ms. Alva, Vice President, Investor Relations and Treasurer. Ma'am you may begin.

Thank you and good morning everyone. Welcome to Gogo’s first quarter earnings conference call. Joining me today to talk about our results are Michael Small, President and CEO; John Wade, Executive Vice President and COO; and Barry Rowan, Executive Vice President and incoming CFO. Immediately following the filing of the company's quarterly report on Form 10-Q, Barry Rowland will become Gogo's Chief Financial Officer. 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 earnings press release and are more fully detailed under the caption Risk Factors and our Annual Report on Form 10-K and our other documents we filed with the SEC. In addition, please note that the date of this conference call is May 4th, 2017. 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 will present both GAAP and non-GAAP financial measures. We include an explanation of adjustments and other reconciliations of other non-GAAP measures to the most comparable GAAP measure in our first quarter earnings release. This call is being broadcast on the Internet and is available on the Investor Relations website on Gogo’s website at ir.gogoair.com. The earnings press release is also available on our website. After managements' remarks, we'll host a Q&A session. And now it's my pleasure to turn the call over to Michael.

Thanks Vavara, good morning everyone. We had another outstanding quarter with record revenue of $165 million, an increase of 17% from Q1 2016. Service revenue grew 16% in CA North America, 30% of BA, and more than doubled in CA rest of world. CA rest of world service revenue was bolstered by rapidly growing passenger take rates. Our record results in the BA segment were driven by continued strength in both ATG aircraft online and ARPU. We also had another important 2Ku win during the quarter with Virgin Australia. Our technology is already on board Virgin's aircraft and is outperforming the competition in that market. We continue to see momentum in our sales pipeline coming out of last month's Aircraft Interiors Expo in Germany. Moving beyond our recent news, I want to address questions circulating in the market about our satellite capacity. Let me be clear we have more than enough capacity now and for the foreseeable future and we have the most satellite capacity dedicated to the aero market. We also have the lowest bandwidth cost structure in the industry for the following reasons; first, our 2Ku antenna is far more efficient than any of the competitors due to its proprietary design, which yields nearly twice as many megabits per megahertz of capacity. Second, our superior capacity utilization due to our ability to lease capacity where, when, and in the quantity needed. And third, our ability to capture performance enhancements and cost reductions from satellite innovation over time. This is accomplished because of our open architecture multisource leasing strategy. We have access to dozens of satellite positioned at key points on every continent. We have signed deals with nine satellite providers, including our most recent agreement with SES to lease all the capacity on AMC-4. With this new agreement in place, SES will actually move the satellites so it can better serve flights over the Pacific in to and from Alaska and Hawaii. This flexibility, depths of capacity, and redundancy does not exist in the KA band. It is far more cost-effective to lease satellite capacity rather than making large and longtime -- long lead-time investments in owning a few satellites. Our leasing strategy is becoming more compelling each year as the rate of innovation and the satellite industry continues to accelerate. And because of 2Ku's open architecture, we offer our airline partners technological advantages generated from the billions of dollars in companies like SCS, Intelsat, and SoftBank are investing in satellite technology. 2Ku's compatibility with the most satellites across multiple providers is the best way to future-proof an airline's in-flight connectivity technology decision. Our success-based leasing strategy is needed to cover high air traffic cities like London, New York, Chicago, San Francisco, Atlanta, and Seattle. These areas cannot be serviced by one or two global satellites. They require multiple satellites with both wide beams and spot beams. Likewise we've readily secured cost-effective capacity for more distant destinations such as Honolulu, Anchorage, Sau Paulo, and Sydney that are not adequately covered with KA. Added all up and 2Ku is delivering the best performance in the industry characterized by three numbers; 15-98-98. This means 15 plus megabits per second speed to connected passengers, 98% coverage of global flight hours, and 98% service availability. This is the performance we're delivering today to 2Ku aircraft around the world. We are driving continued improvements across all three performance metrics. With the new modem and HTS coming this year, we will see rapid improvement in speed on our satellite network. Wrapping-up, we are delivering what airlines care about 15-98-98, which means high speeds, everywhere they fly, all the time. With that, I'd like to turn it over to John Wade.

Thanks Michael. During the first quarter, we signed an agreement with Airbus to offer factory installations on the A320, A330, and A380 aircrafts. 2Ku is the first next-generation in-flight activity technology to be selected by Airbus at factory installations. Our airline partners can now talk and also directly to Airbus over the 2Ku. The first A350 factory retrofit should takeoff later this year. Starting in 2018, we expect to see -- begin seeing OEM factory installed aircrafts. This new agreements provides the path towards OEM installation on all of Airbus aircraft. To put this in perspective, there are more than 17,000 Airbus aircraft on order to-date, and more than 13,000 from the A320 family of aircraft. This [Indiscernible] opens up of significant new markets to us. Also two weeks ago, it was announced that we would install 2Ku on Delta's new Bombardier C-Series aircraft at the factory. During the quarter, we also made progress in 2Ku installations. We now have completed more 170 aircraft installations on eight airlines including Aeromexico and Canada, British Airways, Delta, [Indiscernible], JPA, Virgin Atlantic, and most recently Virgin Australia. As we mentioned in our Q4 call, the pace of installation this year will mirror that of last year, a slower installation pace at the start of the year, with a significant ramp-up up to Labor Day. Certification and aircraft engineering capabilities are a challenging and often underestimated aspect to succeed in our industry. We're obtaining the additional STCs we need. We recently received the 2Ku STC to single-line Airbus A319s, A320s, and A321s, doubling our STC coverage to around two-thirds of the world's 2Ku applicable aircraft. Given this and other STCs, we expect to hit our guidance of $4.50 to $5.50 2Ku installed across by year-end. With that renewed 2Ku aircraft taking flight, our brand experience is a resurgence as airlines and passengers can now see the first-hand, the incredible internet experience that ample capacity provides. Turning to Business Aviation, as Michael mentioned, we had another outstanding quarter in our BA business. I'm excited to announce that Gogo Biz 4G is flying on our challenger test aircraft. Our 4G service launch is expected later in Q2 on track with our expectations and STCs are in progress to satisfy the many orders we've already received for the Gogo Biz 4G product. As an update on our previously announced next-generation ATG technology, we just this week achieved speeds of 134 megabits in the lab. We're on track for deployment in 2018. Now, I want to turn it back over to Michael to introduce our new CFO, Barry Rowan.

I want to welcome Barry to Gogo in his first Gogo earnings call. Barry has extensive experience in finance and corporate strategy and a long track record of value creation. He served as a CFO in public companies including Vonage and Nextel Partners. What distinguished Barry from the other candidates we interview was both his financial acumen and his ability to be a strategic partner to me and the rest of the leadership team. I also want to thank Norm Smagley for building a world-class finance organization that will serve as a solid foundation for Barry moving forward. Now, I'd like to turn it over to Barry to run through the Q1 numbers. Barry?

Thank you, Michael for the kind introduction, and good morning everyone. I'm thrilled to be joining the Gogo team at this very exciting time for the company and the industry. Let's get right to the members. We had a great first quarter. Total revenue was up 17% to $165 million. Service revenue grew 23% to a record $146 million. Adjusted EBITDA of $11 million included $9.4 million in incremental spend for next-gen ATG development. Our adjusted EBITDA margin excluding the ATG milestone payments reached 12%, up 200 basis points from last year. We are reaffirming all of our 2017 and long-term guidance, which can be found in our earnings release. Now, turning to segment results. CA North America service revenue increased 16% to $97 million, driven by an increase in aircraft online to over 2,700 and stronger ARPA. For the quarter, ARPA grew 6% to $142,000 driven by 14% growth in passenger connectivity revenue and more than 70% growth in passenger entertainment and connected aircraft revenue. Our connectivity take rate increased to 8.3%, up from 6.5% a year ago, demonstrating the benefit of the ATG offload from 2Ku and the potential of the multi-payer strategy. We expect ARPA growth to continue throughout 2017, driven by first significant increase in available bandwidth as we upgrade North American aircraft to 2Ku; secondly, the continued expansion of the multi-payer strategy; and thirdly, a stable regional jet count. CA North America segment profit of $11 million included the $9.4 million spend for next-gen ATG development I mentioned earlier. The segment profit margin excluding the ATG milestone approached 21%, up nearly 500 basis points from last year. As discussed on the fourth quarter 2016 call, we expect a total of $20 million of incremental expense in this segment in 2017 for the next-gen ATG development. Now turning to CA rest of world. Total revenue for the quarter more than doubled to $10 million, driven by strong growth in ARPA and aircraft online. Aircraft online increased to 281, up 44 versus the prior year. We continue to expect roughly 150 2Ku installations for ROW in 2017. Our CA ROW 2Ku awarded, but not yet installed aircraft was approximately 650 at quarter end. For the quarter, we generated annualized ARPA of $202,000, up 45% from the prior year, driven primarily by higher airline paid and third-party paid usage. While we expect some ARPA dilution later this year as new international partners launch service, it is clear that abundant capacity and the multi-payer strategy are already driving strong growth in revenue per aircraft. Rest of world segment loss for the quarter increased to $27 million from $20 million in the prior year and was up $2 million sequentially. Although quarterly revenue was strong, it was offset by the planned increase in expenses, primarily for new airline launches. We continue to expect 2017 to be the peak loss year in the segment with improvement in 2018 as ARPA growth and increased aircraft online drive better ROW service margin. Now, turning to Business Aviation. Service revenue for the quarter was up 30% to a record $40 million, driven by 18% growth in ATG aircraft online to over 4,300 and a 12% increase in ATG service APRU to nearly $2,800 per month. BA equipment revenue of $16 million was down $3 million from the prior year, but up $1.2 million versus the prior quarter. We will start to recognize some of the $5.7 million of deferred revenue under the 4G Sign and Fly Program midyear. As John noted, there's great customer interest in this product and we look forward to its commercial launch this quarter. Segment profit was up 29% to $26 million, representing a 46% segment profit margin. This is up six percentage points from last year, driven by 30% growth in high margin service revenue, which represented 71% of BA revenue for the first quarter. For the company as a whole, first quarter consolidated cash CapEx of $59 million was $35 million higher than the prior year due to increased airborne equipment purchases to support 2Ku installs. We ended Q1 with $439 million of cash on hand. This includes $68 million in net proceeds from the issuance of additional senior secured notes in January. Q1 has seasonally high working capital, driven primarily by the timing of interest payments. The cash used in the quarter is consistent with our full year expectations. To wrap-up, our strong financial performance in the first quarter, coupled with increasing 2Ku installation capabilities have made for a great start to 2017. We expect the momentum to continue. To end on a personal note, I wanted to say how much I look forward to working with you, our investors and analysts, in the months and years ahead. I know many of you from my previous CFO experiences and I look forward to hearing your perspectives on Gogo in the coming weeks. Operator, we're ready for our first question.

Thank you. [Operator Instructions] Our first question comes from Ash Birla with Dougherty & Company. Your line is open.

Yes, thank you guys. Congrats on a great quarter. Can we talk about the next-gen ATG spend? When does that $9.4 million -- how much is left to go and how much has that come off later in the year?

Yes, Ash its Barry. As we said on the previous call, we expect the next-gen ATG spend the $20 million in OpEx of which $9.4 million was recognized in the first quarter. The rest will be spread throughout the year, but in much smaller milestones. And on the CapEx side, there's about $50 million, which we have not incurred any yet, but that will begin later in 2017 and spread from 2017 to 2019.

Great. Thanks Barry and welcome to Gogo. So, I just have a few follow-ups. Michael SmartSky raised $177 million, have you guys seen them at all in the supply chain in the dealer network at all?

I kind of throw that one to John Wade.

Hey Ash, good to speak with you again. What we're seeing really in the supply chain right now is that continued strong interest in Gogo Biz 4G. As we've mentioned before we got a significant order book already for that product. And I would say right now all our views are that we're going to have a very strong year with 4G.

Sure. Thanks John. And then -- so John just to follow-up little bit on that, I mean -- as you know we've talked to them -- it's been four years since they have saying they will build the network. Do you guys have any color? And I know that is the question probably for them, but if you can provide any color, where do you see -- you have 200 towers -- they have and where do you see them? And do think that $170 million is enough to build an ATG network?

I think in terms of where their network buildout, you really should probably ask them on that. I think our view in terms of what it takes to build and operate a [Indiscernible] network and requires more money than that. We can say that based on our own for experience. I think we can also say that with the developments that we've seen as recently as this week as I mentioned during the script, we're already seeing performance in excess of 100 megabits a second lab. If you couple that performance with the licensed spectrum we have with our own ATG solution, we really think that this is going to be the superior solution and we think the market is going to -- spoke with its checkbooks that's the one is want to go with.

Okay. And just one last one, Michael -- maybe two last one. If you have 136 megs, why do you need 2Ku in North America? And the second one is Alaska, did we see a little different tone in your voice, like I think when you mentioned Alaska and Hawaiian routes, I mean have you -- can you share what they are telling you because I know that they have an [Indiscernible], so it does -- and does Talos, does their network cover Alaskan routes?

Hey, so two questions. With -- over 100 megabits per second at next-gen ATG why 2Ku and its ultimately coverage is fundamental. Most mainline aircraft fly to the Caribbean, or Mexico, or Hawaii. And so to maintain coverage of the satellite solution, some TV and 8-K solutions, there's also benefits of satellite versus air-to-ground, of course, air-to-ground is great for smaller aircraft with smaller antenna. But we will match the speed on air-to-ground with 2Ku. On the second side on Alaska, again, we don't comment on individual airline negotiations, although we do acknowledge as Alaska said publically they are looking for a satellite upgrade. To maintain this earlier in the script, we have the superior solution and particularly to Alaska and Hawaii, we have rock-solid coverage there, we just moved the AMC-4 -- we just contracted for AMC-4, so we'll have tremendous coverage over the Pacific including routes doing from Hawaii and Alaska.

Okay. Thanks. I'll jump back into queue. Thank you.

Thank you.

Thank you. Our next question comes from Philip Cusick with JPMorgan. Your line is open.

Hey guys. Thanks. First on, I guess, following-up on next-gen ATG, what gives you confidence, Michael, in launching that in 2018? And should we think of that as a launch for your testbed plane or commercial launch? When do you start spending for STCs for that? And can you talk about the pace of OpEx from here, obviously $9 million, I think John already addressed this, of 20, it sounds like it's going to slow down quite a bit from here? And then second, Barry, can you talk about the due diligence you did on joining Gogo before coming in? And what got you excited about coming on Board? Thanks.

So, our next-gen ATG, it will be a commercial launch in 2018. What gives us confidence is we've been working on the technologies that underlie this for a decade. This is a new effort for us. We announced it last year and so far we're hitting all our milestones against that effort right on time and right on budget.

And Phil to your question about the due diligence I did and the reasons for my joining and it's great to be working with you again. I did a lot of due diligence. I wasn’t actually initially interested. I wasn’t looking for a position. I was quite happy. Then as I had initial conversations with Michael and with the Board, I could see the opportunity here. So, I did -- a lot of my due diligence had to do with the economics, particularly the fundamental customer economics. I would summarize my reasons for joining in three areas in response to your question. You asked kind of personal questions, so, I'll give you a bit of a personal answer related to the business, the people, and then what I think is my ability to contribute. On the business side, it’s a business I can get very passionate about. As you know I've been helping build technology companies for over 30 years and around 20 years in communications related to space and I find this a very interesting and exciting business. But more fundamentally, I think -- and importantly, I should say that the fundamentals here, I think, are very strong. Our aircraft connectivity is going to be a given people want to connect in the aircraft. The penetration levels are low with the increased number of planes over time about makes for a great opportunity and Gogo has a leading market position. So I think the fundamentals which often carry the day at the end are very strong. I think it’s also a good time to be joining Gogo with the new technology in 2Ku coming out and the next-gen ATG, the customer economics are very compelling there as I looked to those and really got underneath the covers there. So I think that is something that is makes for an exciting time to be here and also I think the evidence in the market of the recent activity of 2Ku based on the backlog I think meaningfully derisks the company over the next couple of years as we aggressively install their backlog. So I think with that significant market opportunity Gogo's leading position and a strong backlog. The company is in a good position to execute on those compelling customer economics.

And until that [indiscernible] here I can say why I didn’t say it in the script one of the primary reasons I want to hire various -- he actually asked me more questions than I asked him during the interview process, he wanted to get to the bottom of it.

Yes, I did lot of that including kind of developing my own investment thesis looking at the company's from that standpoint. So the business was clearly an attraction and at this time in particular. Secondly on the people side, from my first conversation with Michael to meeting the Board, the rest of the leadership team is fractionally as a team with a high degree of competency and a deep commitment. People are very passionate about making us work and very committed to working through the inevitable ups and downs of building a business like this and I think there's also a deep sense of character and integrity that I found myself feeling like I can really build some chemistry here in the inevitable part of the team. And then finally in terms of my ability to contribute that’s very important to me feel like I could make a difference. This is the fourth public company I will serve as a CFO. I think the last two are particularly relevant in that they were companies with strong fundamentals, but frankly were under varying degrees of significant pressure in the case of next of partners and bondage and next of partners we were able to grow that can breakeven EBITDA to $750 million in the four years that I was there and bondage were able to achieve a comprehensive turnaround, it’s now still being executed by the team that’s still there, so I feel like the experience I had would enable me to begin and be helpful to the company. So hopefully, that I gives you a sense of both the reasons and the level of my excitement for being here.

Thanks Barry.

Thank you. Our next question comes from Robert Gutman with Guggenheim. Your line is open.

Hi, thanks for taking the questions. ARPA in the ROW segment got big boost last year. It remains at a high level; it continues to actually go higher. Aside from launches that could cause a temporary headwind there, is this level sustainable or are there any temporary sponsorship program supporting this level?

This level is sustainable when you have the bandwidth you can grow ARPA and the primary driver is Japan Airlines built to airline paid service for the entire flight and we saw rapid increase in passenger take rates and also as results of that fundamental driver here. And we don’t see similar set of programs appearing at multiple airline going forward and we now have best days available to accommodate those. Later in the year, as we launch some of the additional airline like British Airways and Air France those new planes will dilute the numbers, but the existing aircraft which is highly sustainable.

Thanks.

[indiscernible]

Thanks. And one follow-up, if you on the Airbus line fit approval is that apply to any of your existing customers in terms of their future deliveries and is it opening up the opportunity or has yet open up the opportunity for negotiations with new customers?

And the answer to the first one, no, all of our current backlog is OEM retrofit or true retrofit. In terms of opening up opportunities with current and existing customers absolutely such I think a very significant moment for Gogo in terms of true life of both Airbus and Bombardier and I think you can expect to say there is more customers taking the opportunity to take the market leading performance of 2Ku on factory level aircraft.

Great. Thank you.

Thank you. Our next question is from Simon Flannery with Morgan Stanley. Your line is open.

Hi, this is Landon Park on for Simon. Just wanted to start-off with the 2Ku Installs, it seems like you guys installed about 20 in April, is that good run rate to use until the ramp in September or how should we think about that?

Month-to-month is going to be variability based on airline and aircraft availability, but even the things like Easter weekend in April I see effects the aircraft availability and re-planning. So when you look at any particular month right now is indicative of what is going to happen post Labor Day and when the airline is traditionally available for installation. So it's going to be bumpy here over the next few months, but we look more at the end of Q3, Q4 for the run rates that we are expecting to achieve. The issue looks like the thing we need to make sure we had in place is STCs and we are very comfortable we’re going to have STCs in place, in time for Labor Day kick-off.

Okay. That makes sense. And then looking at CA-NA just can you take us through what you guys are expecting on the take rate obviously very solid number there and do you think 6% ARPA growth you saw in the quarter, is that sustainable run rate or how do you think that will turn throughout the year?

There is 6% is indicative of where we stand now to bring more bandwidth. We are going to have room to accelerate our and we are just beginning to get the bandwidth benefits of the 2Ku planes. We now crossed 100 planes installed with Delta and most are all upgrades from ATG creating more capacity on those planes clearly but also offloaded the ATG network. So yeah, so it's what we’re doing now and actually as keep 2Ku going at some point we should be able to even improve on 6% ARPA growth.

Okay. And just one last one…

On take rates -- sorry I missed the other half of your que. They will keep growing because we can we have the capacity to take on more customers and begin segmenting the market beyond just going after the hard-core business traveler were now able to find ways to bring in the leisure traveler to.

Okay. That’s great. And just one last just on SES deal, I believe they indicated that they would begin recognizing revenue towards the end of second quarter, just wondering how we should think about that on the expense side for U.S.?

The SES capacity there is consistent with our plan and it’s consistent with our objective to get to over 50% service margin in rest of the world as we are doing today in North America. And don't forget our capacity is highly affordable, so if we buy more and one place we can reship the capacity that we have particularly with our Intelsat and SES contracts, so we get to moving around. So this capacity is highly fungible globally.

Okay. Thank you very much.

Thank you. Our next question comes from John Hodulik with UBS. Your line is open.

Okay. Thanks. Maybe some questions some of the new capabilities. First Michael on the new modem could you remind us what’s the difference in sort of speeds or performance you expect? And how quickly will this sort of make its way into the base, if it's not -- hasn’t started already? And then similarly, on the next-gen ATG side, I imagine once it becomes available it will go into all new installations but how should we see this sort of penetrating the existing base of both commercial and business users? Thanks.

Sure, John. So the new modem actually the production model of the new modem is on Jimmy Ray our test aircraft and it removes the bottleneck on the modem it create to sleep in and so we are now seeing in the zip code of 70 megabit per second on wide-beam satellites and over a 100 megabit per second on spot beam satellites and that will go into the marketplace. Second half of this year, we'll begin installing them actually at a quite rapidly great. And that new modem not only benefit 2Ku, it will benefit the Ku planes. One additional benefit of the new modem is the reverse link, it is slower like for everybody, but we get real improvement on the reverse link and that's going to show up in a very real way in the passenger experience and passengers have really, really noticed that. Next-gen ATG won't on every aircraft. It -- well even the ATG aircraft. It will likely go on the regional jets and larger business jets -- some percentage of large business jets. The antenna is about 30 inches long, it's like a low -- only four inches tall or four inches wide. On the bottom -- it goes generally on the bottom of a plane. And so those planes will now have the ability to get very fast service and also those planes will further offload the existing ATG network to the extent most of the traffic. So, 2Ku and next-gen ATG, good in their own rights, but tremendous offloads of the ATG network.

Great. And one quick follow-up if I could. Agreed with the last question that the 8.3% take rate was stronger than we expected, can you talk about how you're bringing in these -- that sort of non-business customers, is it just rejiggering the price? Are there other sort of partnerships business related that you have with T-Mobile on the -- in store for us or how are you going after that segment of the market?

Again we go after this in conjunction with our airline partners in a very bi-airline and sometimes we do it in conjunction with third-parties. The two leading reasons that its going -- now the take rate is going up is the T-Mobile, a significant number of new customers coming and franchise we have very few T-Mobile users as existing customers, and so when they operate it for free, those are virtually all incremental new customers. On Alaska Airlines, we introduced the messaging task and so basically primarily for IMS it is a predominant use and that's bringing in some additional users. In addition, the dilution from adding a whole bunch of new RJs ended for all purposes, so we weren't eluding take rate that way. So, those RJs are continuing to grow and the main line are continuing to grow, but there is no dilution in the new plane -- new large.

Got you. thanks Michael.

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

Hi, thanks for taking the questions. Just a couple of quick ones. The first can you give any update on the 2Ku install time, I might have missed that during the prepared remarks?

Sure. But we continue to set the record here and we have now achieved installations with experienced crews of under three days, which as far as we know is by far the fastest installation of a larger item system. So, it's going great.

Great. And then on the AMC-4 capacity deal, I know -- was it all capacity or was it all remaining capacity on that satellite that you locked up?

All capacity.

Okay, great. And then any update on the American Airlines install, I know you guys have talked about that at lengths on other calls, but are we still just thinking about it in the same way?

Yes, we are predicting that we'll start to see the first and de-installations happening late this year and then continuing over the next few years. And that's the way we're looking at that.

Great. Thanks guys.

Thank you. Our next question comes from Andrew Spinola with Wells Fargo Securities. Your line is open.

Thanks. I wondered if you can just give me some additional color on the cost of service trajectory in your commercial business. You've got a very substantial ramp of 2Ku in North America this year, but if I look at the cost of service in that segment, it was down sequentially and flat year-over-year, while in the international business, it was up $5 million sequentially and it doubled year-over-year. I'm just wondering why we're not seeing a bigger ramp in North America and you maybe is that relative to the mix of different types of cost of service, what were some of the drivers there?

So, again, as we emphasized in the script, we have the ability to get capacity -- lease capacity when we need it, where we need it, and the amount we need which is by far the efficient way to acquire capacity versus buying a whole bunch upfront by owing a satellite and then having to fill it and -- or having the architect where the capacity may go away way in advance. And the satellite design years before you know what you need it. So, we have the efficient way to acquire capacity. There will be a lot of decisions along the way -- purchase decisions. Quite frankly, where cell sites are built on the ground isn’t a question, you generally ask operators there. So, I think and I also made the point about the fundability of capacity so where the portability of capacity. If we buy more like AMC-4, we will now say do SES, we need fewer spot beams. In that region, we want to lay up more in the other areas. So, I think the net result is we're able to match capacity purchases with the planes very, very real way.

And Michael I know that's a good point, the fundability, the capacity and just the nature of these -- the new networks where you've got to manage network as opposed to just buying pieces of transponders. I'm just wondering in the complexity of that type of accounting is there any capacity that's serving North America, that's being expense through the rest of world segment?

No, we can trace capacity to aircraft quite well and we can trace -- we have our -- we allocate revenue based on where the aircraft flies. So, we think that works very well.

Okay. And just to stay on the topic, 600 basis point improvement year-over-year in gross margin and commercial North America, was there -- is this a sustainable level? Is there any one-time benefit that maybe drove the cost of service down? Anything you can give on that result?

I -- there's no one-time issues I'm aware of.

Okay. Last question from me. Just on the balance sheet, the deferred airborne lease liability declined $25 million sequentially. I think that's a high teens' rate. That's a number that's been going up pretty -- every quarter, so I'm just wondering what changed there? Why did that decline?

I'm going to let Vavara take that one.

Thanks Michael. Hi Andrew. So, we did have one of our international customers, specifically Japan Airlines that basically migrated from one service model to a different service model and that -- with itself, it just changed some of the geography on the balance sheet. Fundamentally, nothing really changes in this particular case other than we will now start recognizing a little bit of the equipment revenue as well as the cost of equipment in on the face of the P&L. As we mentioned in the fourth quarter call, that's the elements of our airline directed model accounting and that's the -- that's what's happening with Japan Airlines.

Thanks very much.

Thank you. Our next question comes from James Breen with William Blair. Your line is open.

Thanks for taking the question. Michael can you just -- or John, can just talk about what you're seeing on these 2Ku planes early on? Obviously, we see the blended number for ARPU and for penetration growth, but may be some all board specific to the plans that you have up and running at this point? Thanks.

What we're seeing is a phenomenal customer experience. It's -- like people are used to using the Internet to the ground, in their homes, in their offices, we've seen the entire plane for all purposes, get on one time and use it, streaming works great. We summarize the experience -- again we're trying to put rigorous performance metrics around this and be able to comminute them to you as 15 plus megabits per second, 98% coverage of global flight hours, and 98% service availability. And not only -- that's what we're delivering today and it's getting better every day.

Is there any way you can look at it in terms of planes that came online maybe two months ago that you can quantify the jump that you see in either ARPA or take rates of those planes sort of over the course of the first of couple weeks of being in service?

That's -- we do see benefit there. I think what you're going to see is the ARPA benefit is critical reason; we saw 6% ARPA growth in the first quarter. That wouldn’t have been possible without 2Ku nor with the 8 plus percent take rate been possible without 2Ku. So, not only do we get to see the benefit on those planes, but we get to see the offload of the ATG network. But fundamentally, it is very clear to me the capacity -- additional capacity is the key to growing our revenues.

I think the other part -- this is Barry, I would add to that is if you look at ROW in a very substantial ARPA growth there that it's a smaller base, so you see the impact of the airline directed model there and really the increased usage as a result of the airline being to offer free service to the passengers, but still a benefit to Gogo as the provider.

Great. Thanks.

Thank you. Our next question comes from Philip Cusick with JPMorgan. Your line is open.

Hi, I just wanted to follow-up on the last question. Can you talk at all about the experiences you people are getting on JAL? What's the pricing look like? What's the usage look like? And I think there was an unlimited video effort there for a while, what are people seeing today?

On JAL, we have gone to an airline directed model where the airline pays for that capacity and cause the accounting change that of our described and we are seeing -- we can't disclose all take rates due to our agreement with the airline, but we -- they actually fly 777s with 500 seats on very short flights. And that means that by -- almost by definition, everybody is using service all the time if your flight is only an hour long and [Indiscernible]. And we are seeing a tremendous number of users on very large aircraft and the service is performing averagely, there's customer satisfactions off the charts good. So, I'll say it again, we're entering an era much greater bandwidth abundance and that is going to do very good things for our financial statements.

Thanks Michael.

Thank you. Our next question comes from Ash Birla with Dougherty & Company. Your line is open.

Yes, thank you guys. Thanks for the follow-up. I -- John in your prepared remarks I think you had mentioned or kind of alluded to that your line fit on Airbus all aircraft owner aircraft and I think when you have filed the press release, the A350 wasn't included, so do you have A350 line fit apart from what you're doing with taking the plane to a different hanger and then putting it?

No, not today. What we said in the prepared remarks was we were going to have true line fit as part of the production line for 320, 330, 380. We are anticipating getting line fit on the 350 after it comes out of the industrialization phase. So, that would be at a later date. But in the interim, we have the A350 service in approach and the -- which is the line fit retrofit if you will and the first of those aircraft deliver to Delta late this year.

Okay. And Michael I know a lot of questions have been asked on take rate, just one last one, this 8.3% were there apart from T-Mobile, were there any other promotions like Google or Facebook or any other promotions going on?

The only other significant change that drove the year-to-year improvement was the messaging service for Alaska. Although I will say that T-Mobile is the larger factor of the two. And then there's some underlying pros take rates across the base besides those two -- and I won't say two programs.

Yes, and Alaska is only 5% of your aircraft, anyway, so okay. All right. Thanks a lot of guys.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Michael Small for closing remarks.

Thank you. We're pleased with the quarter -- mostly pleased that we're starting to see the benefits of the additional bandwidth 2Ku is bringing to here both directly and through the offload and that started showing up in the increase pretty start that you saw this quarter. So, thank you all for joining and look forward to our ongoing dialogue with you. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.