Good day, ladies and gentlemen and welcome to the Gogo Inc. Second 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. Please begin.

Good morning everyone. And welcome to Gogo’s second 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 CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described on our earnings press release and are more fully detailed under the caption Risk Factors and our Annual Report on Form 10-K and other documents filed with the SEC. In addition, please note that the date of this conference call is August 7, 2017. Any forward-looking statements that we may 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 second quarter earnings release. This call is being broadcast on the Internet and is available on the Investor Relations section of 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 great pleasure to turn this call over to Michael.

Thanks, Varvara, and good morning, everyone. We had another excellent quarter with revenue up 17% to $173 million and now have 2Ku service on nearly 250 aircraft across nine airlines around the world. The launch of 2Ku on five airlines in the second quarter alone and investments in retrofit and OEM programs, position us for a substantial increase in 2Ku installations after Labor Day this year and in future years. 2017 is revealing our leading technological and global operating capabilities as we lay the foundation for our continued leadership and what will be an enormous rapidly growing market. We expect our EBITDA to increase substantially in the second half of the year and into 2018. We reaffirm guidance of achieving positive free cash flow in 2019. In Commercial Aviation, the performance of our 2Ku technology is being recognized and experienced by airlines and passengers. Our announced awards of 1,600 2Ku planes are sizable relative to our 3,100 connected commercial aircraft currently in service. By early next year, we expect enough planes in North America to have been converted to 2Ku to meaningfully improve overall network capacity and performance, including offloading some of the demand on our ATG networks. In Q2, pay grades and CA-NA increased more than 20% and ARPA grew as we start to see the benefits of more bandwidth in the multi-payer strategy. In CA-ROW, revenue more than doubled over the previous year for the second quarter in a row on robust ARPA of $226,000 for the quarter, up 56% from a year ago. Based on the strong airline response 2Ku, the cost of performance advantages of our airborne connectivity platform and our ubiquitous coverage, we expect to announce additional large commercial airline wins from around the world later this year. Business Aviation continues to deliver exceptionally strong…

Thank you, Michael. During the quarter, we continued to focus on preparing for the upcoming ramp for Q2 and Q4 installations. We’ve also closely coordinated with our airline partners to ensure aircraft available to meet our agreed-upon schedules. As of 2016, we will see the majority of our installations occurring after Labor Day. The operational progress we have made is the basis for reaffirming our guidance of installing 250 to 550 2Ku aircraft during 2017 and to increasing installations beyond this level in 2018. We now have the capability to install our to install our airborne connectivity systems at an unprecedented speed and scale and raise the bar for the industry and what is conceded achievable. One of our most significant operation achievements this year has been to reduce the 2Ku installation side, to less than two days. Something, none of our competitors come close to achieving. This progress result in significant cost savings for us, and even more importantly, enables our airline partners to keep their aircraft in service and generating revenue. In parallel, we’ve been working aggressively to ensure we have the in STCs place to complete installations in accordance with the schedule established with our airline partners. By Labor Day, we expect to have the STCs we need for over 90% of this year’s planned installations. And by year-end, we’ll have STCs prior to 80% of the aircraft that can install 2Ku. We streamlined our STC processes, which will reduce the cost of bringing new aircraft online as well as shorten the time between contract awards and initial installations. Our OEM efforts also continued to show strong progress for the first Delta Airbus A350 arriving in the U.S. just this weekend, meaning that Delta second delivery of the first OEM installed 2Ku system. We’re making good progress of going to for line fit optionality on this Air France. Turning to business aviation. It’s a great business for Gogo. It continues to operate highly efficiently with strong operating margins. Gogo 4G is now started shipping as planned. Our next-generation ATG solution is on track to be delivered in 2018. Our first 2Ku private aircraft is now an operational service, and we expect to see more orders this year for 2Ku and the BVRP market. We also seeing ATG adoption building in smaller and older airplanes confirming the significant market potential across the entire business aviation market. The broadened technology portfolio offerings that increase connectivity platform capabilities. BA has a large runway for growth ahead, and we continue to penetrate the more than 16,000 private aircraft currently without connectivity. I’ll now turn it over to Barry to discuss our financial performance.

Thank you, John, and good morning, everyone. Let’s jump right into the numbers. We delivered another strong quarter of growth with $173 million in total revenue, up 17% from the prior year. Service revenue grew 21% to a record $254 million. Adjusted EBITDA of $9.9 million was lower than the prior year as it includes approximately $14 million in incremental expenses related to planned investments, all of which will continue – will contribute to future growth and profitability. Included in these costs were investments the launch 2Ku service on five airlines, OEM program costs and next generation ATG development. We previously provided guidance that we expect to incur approximately $50 million in incremental expenses during 2017 to launch new airlines and for next-generation ATG development. During the first half of 2017, we invested $30 million in these initiatives, which included some accelerated expenses associated with our OEM programs. We expect these expenses for the full year to be somewhat higher than previously planned. Let me now turn to the results for our individual business segments. For Commercial Aviation North America, service revenue increased 10% over the prior year to $99 million. As a result of an increased number of aircraft online to nearly 2,800 and stronger ARPA. For the quarter, ARPA grew 3% to $141,000, on 8% growth in passenger connectivity revenue and nearly 50% growth in passenger entertainment and connected aircraft revenue. Our take rate increased over 20% to 7.7%, up from 6.3% a year ago, largely due to the success of our multi-payer partnerships. We expect a continued uplift in take rates based on the additional bandwidth from more 2Ku aircraft online and the expansion of our multi-payer partnerships. CA North America segment profit of $16 million reflects the impact of the investments we previously discussed, resulting in…

Thank you. [Operator Instructions] And our first question is from Ric Prentiss Raymond James. Your line is open

Thanks. Good morning, guys.

Good morning, Ric.

Hey, a couple of questions for you. Obviously, you mentioned a couple of times, you expect to announce additional large commercial around Rest of the World later in 2017. Talk to us about how you’re winning those awards? And also if there’s any update on the process for Alaska and merge as far as what’s important to that decision and timing?

Sure, Rick. So I think it is increasingly recognized by airlines around the world, particularly when you have a global coverage need that 2Ku is the preeminent solution as we described 15, 98, 98. Secondarily, Gogo’s operating capabilities around the globe are becoming industry-leading, where our ability to take care of airlines get their planes installed with minimum ground time and keep the maintenance levels high. That’s being recognized, that we are able to serve airlines. So we’re well advanced in a lot of processes with airlines around the world and when the airlines are ready to announce, we will announce some significant wins this year. As far as your question for Alaskan Virgin, we don’t, as a matter of policy, comment about specific deals. But we – it’s not just our coverage of Alaska and why, but it’s the overall performance of 2Ku and our ability to serve airlines, I think, that will be our strong point since as we pursue that airline.

And the install time getting the 2Kus down to under two days. That’s impressive. Update us as far as how many lines you’ve got as far as getting 2Kus installed around the world. Obviously, it ramps up significantly after Labor Day. But just trying to frame your ability to hit that 450 to 500 this year and then a higher phase next year.

Sure. The number of inflation lines varies. Some are dedicated and some are more associated with kind of regular maintenance. The sort of three main components you need to look at in terms of how you get this done, which is having STCs, that can be a real-time hogger, then have them. And as we noted in the script, we’re really – for this year, we’re pretty much there. And by the end of the year, we’ll have all the major STCs really moving forward. Supply chain is the next bit of it. Can you get the parts there? And supply chain is set up well to – ready to go, and we’ve got the commitments from the airlines, where the installation teams train. We have been very successful in terms of getting that inflation time down to sub-two days. And I think that, again, speaks to what Michael was talking about a minute ago about how we really an operationally excellent company. And that’s a significant competitive advantage.

I imagine that’s important too to get more awards given the backlog.

Absolutely.

Great. Thanks guys.

Thank you. The next question is from Robert Gutman of Guggenheim Securities. Your line is open.

Hi, thanks for taking the questions. So if you could provide some clarity on the installations in North America. In the second quarter, it seemed to be pretty high number, significantly higher than what we had expected. And also, just more broadly, given the pace of conversions, you mentioned that next year, you expect to be at a much higher level of capacity and performance in North America. Can you provide a little more color on that too, where you expect to be the current base of conversions by about this time next year?

So when you say conversions, do you mean upgrades? Or you mean…

Yes, the upgrades.

Sure. Through the rest this year, there’s a lot of conversions that happened, primarily with Delta. We’re shipping also 300 airplanes this year alone in terms of Delta. So probably getting closer to 400 overall, I expect. So that’s basically, again, the number of the Delta aircraft. Outside of North America, actually, there aren’t that many conversions happening. A lot of them are new aircraft that should be adding to the fleet. So next year, I expect you to see a significant move of aircraft added overall as opposed to conversions.

And one other point subsequent to the end of the quarter. We activated our first American Airlines plane to 2Ku. So that actually was delivered early and those conversions will begin this year and will accelerate into next year.

Great, thanks. So some color about North American installations in the quarter, 77, I think, was the number.

Yes. Primarily, Delta. We had a number of Delta aircraft that were converted and that was all part of a ramp-up that starts in the next couple of weeks here. We’re making sure that all those installation lines and the crews are trained and as part of that, we were able to show that significant improvement in installation time to getting it down to sub-two days.

Great, thank you.

Thank you. The next question is from Dick Ryan of Dougherty. Your line is open.

Say, Barry, the 248 aircraft 2Ku, is that current? Or is that at the end of Q2?

Yes. That’s current.

So that’s as of today. What would the number been at Q2 and just as housekeeping, do you have that total 2Ku number for March.

It was 226 installed.

Okay. For June?

For June. Correct.

And sorry, but do you the margin number?

Will pull that up for you.

Okay, sure. Going on to the next one. You said the incremental spend of $30 million Q1 for 2Ku and NexGen might need to be ratcheted up from the $50 million previously guided to. Isn’t there any color as how much of that spend maybe incurred in Q2 or second half of the year, and what that spend might look at next year?

First, let me just clarify a little bit what we’ve said. And so the guidance for the year is for $50 million in incremental spend over 2017 – excuse me, over 2016. Of that $50 million, $30 million is for bringing new aircraft online and $20 million is for next-generation ATG development. So we incurred more than half of that during the first half of the year in addition to OEM support costs to bring the Airbus line-fit opportunity online. So the amount that we’ve said as we expect that $50 million number for the year to be somewhat higher and that’s what is pulling the EBITDA guidance down to the lower end.

Okay.

And a follow-up on your earlier question. We had 156 2Ku installed at March 32 and 226 installs at June 30. So we did 70 during the quarter.

okay. And Michael, just a quick one. Pricing strategy. 2Ku versus your ATG pricing strategy. Can you talk a little bit about your current thoughts there?

Well, our general approach will be to take pricing down and more than offset that by increased take rate to continue to grow ARPA and stay on – and we’re on track to double ARPA from what we made, the forecast through 2021. And we’re still on pace for that. We are doing a lot of trials with different airlines on how to best do that. And increasingly, our strategy will be airline-specific. It will not be one price fits all. It will be tailored to the desires of each of our airline partners.

Okay, thank you.

Thank you. The next question is from John Hodulik from UBS. Your line is now open.

Hey, great. Thanks. Just – maybe a follow-up on the last question. Barry, you said in your prepared remarks that you expected some dilution on the ARPA side? Was that just Rest of the World? And then I did notice in the U.S., you did see some deceleration in ARPA from like 6% to sort of in the high 2s. I guess, again, following up, I mean, are you seeing higher ARPA as you shift these planes to 2Ku? And are you executing sort of on – just I’d love to hear what you’re saying in terms of, as you do give cut prices, what kind of lift you’re getting and from an ARPA standpoint. Thanks.

Sure, John. So first, regarding your question about ARPA relative to ROW, yes, that’s what we’re talking about on the dilution. There are really two components to that. It’s the seasoned aircraft online, which have really driven a significant acceleration in ARPA that you’ve seen there, $226,000 for the quarter. We expect those levels of ARPA for the seasoned aircraft to remain in that general ZIP code. That overall ARPA will be deluded beginning in the back half of 2017 by the new aircraft coming online because as we mentioned, 150 of the installs this year would be attributable to ROW aircraft. So that meaningfully dilutes the ARPA. But that’s a meaningful number of aircraft and that would have some ARPA dilution during the course of the year.

Okay. But do you expect to see continued growth in ARPA in the U.S. as you move to 2Ku?

Yes. Well, that’s exactly what we expect to do. And it’s really driven by the same dynamics, which is the combination of more bandwidth and tailored airline programs and enable us and enable them to take advantage of that bandwidth. So as that bandwidth comes online, we expect the increased usage to more than offset the per unit decline that Michael described that we expect over time.

Okay. And lastly just one question on the NexGen ATG network. Can you talk about the costs associated with rolling that out? Sort of where – what you are in the sort of planning and deployment there? And when we can expect to have planes installed that can utilize that new capacity?

Yes. We’re very excited about NexGen ATG, and it will be deployed next year. It will be significant competitive advantage for Gogo, both in performance and cost. We now have received the prototype equipment in our own lab. We’re testing it. We are still achieving 130 megabits per second or higher. And we will have it flying on our plane approximately the first of next year. It’ll be very late this year. First thing next year, and we’ll be in commercial deployment. But all the components are coming together. It’s staying right on schedule and it’s performing great. And on the cost side, it’s very much on track. So we’re pleased with both the performance side and the budget side. So the development costs, we said it would be an extra $20 million of R&D this year. We will be no more than that, so we’re staying right there. The $50 million CapEx deployment will be largely next year, a little this year, a little on 2019, largely next year. And that’s staying right on track. And the cost to install the plane will be ATG range, dramatically less from satellite. Loss will be a very low cost per bp to produce. So the numbers are great. And finally, it will be an overnight install which our airline partners will appreciate.

So Mike, do you think you can start installing planes in 2018 with the NexGen ATG service?

Correct. Both NDA and NCA.

Okay, great. Thanks, guys.

Thank you. Next question is from Philip Cusick of JPMorgan. Your line is open.

Hi, this is actually Sebastiano on the line for Phil. Thanks for taking the question. Just a quick follow-up on the level of RFPs. And it sounds like you guys still have got about additional wins in the back half. And in the past, you had noted that the lack of line-fit, one issue that had come up, are you seeing a meaningful difference now that you have Airbus line-fit? And I think you did mention also Boeing line-fit, but any idea on the rough estimate of timing of when you look to achieve that? And then I had another just a high-level question. You did reiterate your, I guess, conviction for long-term guidance, I think particularly free cash flow generation by 2019. But is it safe to assume that the other long-term guidance that you’ve laid out in the past of, first, doubling of ARPA, 30% consolidated adjusted EBITDA margins, et cetera. Do you also have a high level of conviction in achieving that long term as well? Thank you.

I’ll answer the second part first, and then turn it to John Wade to answer the first part. But yes, we stand by our previously issued long-term guidance to generate free cash flow in 2019 and to double the ARPA by 2021. And just generally see a strong ramp from the profitability of all business units including ROW.

Back to the question about OEMs. As we mentioned in the script, we actually did deliver the first – actually, Airbus aircrafts just as we can to about in Atlanta I suggest last night. So that’s a major step forward. We expect to have full Airbus factory per installations in 2018. We actually also expect our first Boeing away in isolation rather right around the end of this year on 787. And we expect to have full lines of optionality either late 2018 or 2019 for Boeing.

I have a one quick follow-up if I could. I guess, just on the 27th, Global Eagle and Shareco kind of announced that, that wasn’t kind of going forward, have you had any additional conversations with them perhaps? Or any update maybe about revisiting your previous agreement?

Again, we won’t comment on specific negotiations. But as we indicated coming into this year, we’ve increased our resources in Asia Pacific regions. We now have well staffed and we are going to be aggressive there in that area of the world. And Hainan is a large airline, so that would be one of the targets. We do target large fleets because we think it is a much more efficient way for Gogo to grow at this stage of the industry.

Thank you.

Thank you. The next question is from Simon Flannery of Morgan Stanley. Your line is open.

Great. Thank you very much. I think you made some comments during prepared remarks about opportunities in the multi-payer models. So perhaps you could just expand on what opportunities – are we going to see things like the T-Mobile deal opportunity sponsorship or indeed, full airline pay, where they operate free to the customers. And then on the 2Ku, just coming back to that, you’ve now had a little bit of experience of taking an ATG plane and having it run with 2Ku for a few months at least. So what’s with the uplift in ARPA are you seeing for those apples-to-apples type planes? Thanks.

Thanks. And yes, exactly as you described. T-Mobile is an example of a third-party paying, and we’ve often referred to Japan Airlines as being an example of an airline paying us results as compared to our traditional model of the passenger paying. We do expect future deals like that. And basically, what permits those deals is having the bandwidth to take on the additional volume. And as 2Ku comes into the market, we’ll do that. So this is a timing issue. We don’t want to get too far out in front of that, of the additional capacity, as we indicated in the script. By early next year, there will be a material change in the amount of capacity, particularly in North America. About 300 more Delta planes will have been converted by that time or during the course of this year. So that’s – be a pretty significant change. We aren’t yet reporting on 2Ku uplift, as I think a lot of people have observed flying. We’re trying a lot of different new pricing models. I would not say any of them are indicative necessarily of where we’re going to go for the long run, other than to say that they will increasingly be tailored to the airline’s preferences. Some airlines, like Japan Airlines, may pay for 100% connectivity. Other airlines may do lesser amount of airline pay connectivity and collect more than the past here. I think there’ll be a wide range. We now have served over 1 million sessions on 2Ku flights. And the performance is great. The stakes are high and that gives us a lot of flexibility on how the price is going forward.

Okay, great. Thank you.

Thank you. The next question is from Andrew DeGasperi of Macquarie. Your line is open.

Thanks. I guess, my first question. You released a statistic not so long ago that 80% of passengers on global flights use a mobile device or as much as 40% to 50% in the U.S. I’m just wondering if that 80% statistic’s spread out across airlines or do you think it was skewed towards JAL? And then secondly, I know ViaSat and Eutelsat are suing Inmarsat in Europe for their planes to develop an underground network there. I noticed that Panasonic Avionics joined our lawsuit. I was wondering why did you decide not to as well. Thanks.

The first question, a slight skew towards Japan Airlines. But remember that there is about 77 planes in Japan Airlines and there’s 180 plus aircraft on Delta international. So Japan Airlines can only weight it so much. So they’re very high mobile usage in general on international flights. And on the second question, I do believe Inmarsat has taken an extraordinary liberal interpretation of their roles to implement their European network but we – we’re focused on winning on the playing field. We think we have far superior service regardless.

Great, thanks.

Thank you. The next question is from James Breen of William Blair. Your line is open.

Thanks. Just a couple of questions. One, on incremental $50 million spending this year. I think Michael said that the – on the NexGen ATG it’s going to be around that $20 million range, so it implies that the rest is coming from the other $30 million. Is that an anticipation of winning more deals with it because of the install rate cooking up? And then secondly, as you look out into the future, you’ve obviously seen good contribution margins on the EBITDA side now. It seems to me the only thing that slowed that down is increased wins and more success-based costs in capital. As you look at the competitive environment and some of the RFPs that are going out, are there any large airlines out there that could potentially significantly impact an EBITDA growth? Or most of the deals at this point, 50, 60 planes at the most, it’s just a matter of getting a larger volume of those deals? Thanks.

Yes, Jim, let me take the first part of your question about incremental spend. So the other part of the incremental spend outside of NexGen ATG is primarily in two buckets. It’s bringing the new aircraft online, it includes some onetime costs, particularly like STCs. It includes a global operations support so there’s heavy investment at the front end of that process and then you get the benefits of that over time. And the other investment is satellite capacity. So there’s some upfront investment there in providing global coverage. But obviously, you had planes in revenues, it significantly leverages that investment. The other part of the investment that we’re making that came through in the second quarter, awards for OEM support costs. The Airbus expenses were accelerated during the quarter to – into that quarter as we take advantage of that opportunity. You see the results of that with the first A350 coming online. So the combination of those two factors are the ones that we expect to be a bit higher for the year. That really is tied to the success in winning airlines and bringing them online.

And as far as the new airline wins, we forecast an ongoing rate of new airline wins, and we target the larger airlines. By large, 100-ish aircraft is what’s realistic out there right now. You can do something more than 100 aircraft in a way that you can do something less. But that’s a general ZIP Code of what a good win in the marketplace is today. And I think we’ve largely captured in our forecast what we expect to win.

Great, thanks.

Thank you. [Operator Instructions] I’d like to turn the call back over to Michael Small for closing remarks.

Thank you, everyone, for joining the call today. We look forward to the remainder of the year as we ramp the 2Ku installations and announce additional airline awards. Thanks, everyone.

Thank you, ladies and gentlemen. This concludes today’s conference. You may now disconnect. Good day.