Good day, ladies and gentlemen, and welcome to the Gogo Inc. First Quarter 2018 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 be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I'd now like to turn the conference over to Ms. Alva, Vice President of 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 Oakleigh Thorne, President and CEO; and Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described in our earnings press release and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K and our other documents filed with the SEC. In addition, please note that the date of this conference call is May 4, 2018. 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 reconciliation and explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measure in our first quarter earnings press release. This call is being broadcast on the Internet and is available on the Investor Relations section of Gogo's Web site at ir.gogoair.com. The earnings press release is also available on our Web site. After managements' remarks, we'll host a Q&A session. And now, it's my great pleasure to turn the call over to Oakleigh.

Good morning, everyone. Welcome to my first Gogo quarterly earnings call. My goal on these earnings calls will be to develop an open relationship with the financial community so that investors can make informed decisions about investing in Gogo. I plan to be candid about our issues, but also candid about how we plan to solve those issues and about the huge opportunity I see for this company to create value for its shareholders. I also want to make it clear, I don’t want to tie the company to old numbers or projections. We are rebuilding our plan, which is part of an integrated business planning process, IBP, and when that's done we will have numbers that our management team can own and communicate. So let me start by discussing the process we are going through to get Gogo back on track, and I will touch on the quarter, and then finish with several examples of how we’re attacking my four priorities of quality, focus, getting profitable, and driving shareholder value. Since joining the Company as CEO eight weeks ago, I try to take a methodical approach to assessing the issues and opportunities we face and to charting a course to fix those issues and realize those opportunities. I spent the first four weeks meeting with staff, in business reviews, visiting our facilities, and meeting with customers and suppliers. The process of doing that it became clear to me that we need to improve quality and control costs. And that to make those things happen, we needed to break down functional silos and reorganize around market facing business units, their own P&Ls and with end-to-end responsibility for delivering quality product to customers. With the new executive leadership in place, we are now embarking on the integrated business planning process I…

Thank you, Oak, and good morning, everyone. Before we get into the numbers, I'd like to highlight three items that impacted our financial results this quarter. First, one of our airline partners transitioned to the airline directed model which had both an accounting and economic impact on the financial results. Second, the adoption of the new revenue recognition standard ASC 606, has amplified the accounting impact of the airline partners business model change. Under the airline directed model, equipment revenue and related costs are recognized at the time of the installation or in this case at the time of the business model transition. As a result, we recognized an incremental $45 million in equipment revenue and $26 million in equipment cost, resulting in a $19 million benefit to net income for the quarter. This impact has been excluded from our reported adjusted EBITDA. As a reminder, these accounting changes are cash flow neutral and business aviation is largely unaffected. We encourage you to review the supplemental tables in our earnings release and first quarter 10-Q for more information on the impact of ASC 606. The third major impact on our financials this quarter of the 2Ku operational issues, Oak described in detail. These are resulting in increased operational costs and lower service revenue. The bulk of the cost will be incurred in the first half of this year. With this context, let's turn to a review of the numbers. Consolidated revenue for the quarter of $232 million was up 40% from the prior year and increased 13% when excluding the $45 million accounting impact I discussed. Our adjusted EBITDA increased to $12 million, up 11% versus the prior year and excludes $19 million accounting impact associated with that incremental revenue. Let me now turn to the performance of our business…

Thank you. [Operator Instructions] Our first question comes from Philip Cusick of J.P. Morgan. Your line is now open.

Phil?

Hey, guys. Thank you. I guess, first, let's go back to cash. Oak, you opened up a lot of doors with this. First, if we think about the business as it is right now, should we -- we can assume that you will -- you’re planning to get this to a cash neutral as you said before act like this is all the cash we’re ever going to have type of model?

Correct.

And does that assume that you don't sign anymore airlines or is that sort of a slow pace of additional signings from here?

If we sign a lot of new airlines -- first of all, we’ve been trying to actually restructure our deals to be more cash flow neutral, especially in early years. So we can manage things that way. If we can sign a lot of airlines though, we feel like we could raise more capital if we needed to, because we’d have the successful business model to take to The Street. So when we talk about a cash flow neutral model, it incorporates both of those things. First of all, getting cost out of the business and second of all taking on future contracts that we can afford.

And I would expect that given the leverage on the business already and probably weaker EBITDA than we had expected, any cash raise would probably be on the equity side rather than the debt side?

So we would look at both of those alternatives. We are looking at refinancing the converts for example. So under the right set of circumstances there could be cash added to the balance sheet through those kinds of debt oriented transactions, but I think it's also fair to say that particularly as we look at the growth opportunities that there would be an opportunity to raise growth capital to be able to fund those and I think the perspective investors would see a good return on that.

Okay.

As with the current shareholders.

And then Oak, you didn’t talk much about the NextGen ATG product. Is there any rethinking of the strategy and timing going on there as well?

Well, I talked quite a bit about the ZTE issue. And until we understand how we are going to resolve the ZTE issue, we can't really project what the impact is on the NextGen project. So course and speed was to have that commercially available by the end of this year, but given the Commerce Department order we are trying to sort out the impact of that. We were literally in the midst of taking delivery of antennas to install right now. So it caught us pretty much midstride.

Got it. And then last one if I can, the change in pricing at the airline that went to airline directed, were they motivated to try and reduce demand or they’re just trying to experiment with elasticity?

I think they were trying to mark up our price to make sure that they were making a profit at every price point. And that’s not the best way to stimulate demand. So we are working with them to try and revise that.

Got it. Thank you.

Thank you. Our next question comes from Simon Flannery of Morgan Stanley. Your line is now open.

Hi. Yes, this is Landon Park on for Simon. I guess, it sounds like EBITDA is expected to essentially bottom in 2Q. But was $109 million in cash burn for 1Q is that expected to be the peak number as we look forward to interest payments and higher installs in 3Q?

So the first part of your question is that, yes, we do expect EBITDA to bottom in Q2 and recover substantially from Q2 into the second half of the year. Regarding the cash burn during the quarter, we'd also expect that to be the highest during the year by a meaningful margin. The reason for that is as I explained there was the timing of some of the interest -- excuse me, some of the payments for the airborne inventory purchases and it was also during the quarter.

Okay. And will EBITDA remain positive in the second quarter?

Yes, I wouldn’t provided additional clarity about that because there are certainly the bulk of the expenses associated with the process for getting 2Ku well are going to be incurred in the second quarter. So I think I’d just say that, we expect it to be very significantly affected during that quarter. But I think the other part of this is important is that the -- those expenses associated with that are larger than one-time expenses associated with that -- getting that the 2Ku up and running and back to the performance levels that it needs to be as opposed to structural issues in the overall business.

And can you give us a size of, I guess, the main expense buckets associated with that and how larger they are in each quarter? Then, I guess, one last question just on BA in terms of the margins. It sounds like you’re expecting it to remain in this 45% plus level moving forward?

So to start with BA, we’ve achieved a record segment margin. And as I talked about there was a very substantial conversion of the incremental revenue to the bottom line. So 47% is particularly high, but I think we would expect it to be higher than the number that it averaged last year which was 41%. So we -- again, see the operating leverage from BA continuing throughout the year. With regard to the primary expense buckets related to the issues associated with the deicing, there are several of them. First, as Oak described, we are replacing antennas. So there's an incremental cost of antenna purchases. There's also the cost of additional airline touches and the work associated with that, and the maintenance personnel. So those are some of the primary buckets that we see. And also it's important to recognize the revenue impact of this, in that the airlines are not going to be motivated to market aggressively until they see the 2Ku system performing at the level that we all expect, and to that point that they can be more aggressive in the marketing and drive the revenues as we planned.

Thanks for that color. Can you give us any sense of the actual size of those? The actual expense buckets that are running through the EBITDA?

So we expect in total that those -- the expenses, that they aren't going to be in excess of $25 million for the year.

Okay. Thank you.

Thank you. Our next question comes from Lance Vitanza of Cowen & Company. Your line is now open.

Hi. Thanks for taking the questions. I wanted to start on the commercial aviation side. So should we be thinking about this as a delay in the EBITDA ramp or will the slope of the ramp necessarily be lower from here on out as well, given the new sort of financial constraints and just the passage of time and sort of opportunity cost and so forth?

Lance, look, I don’t think we want to get into future projections, so we get through our integrated business planning process. We are hoping to get that done by late June and either talk about it on our second quarter call or have a special call to call about, to talk about it. So we will give more concrete guidance at that time.

I would just say conceptually, Lance, that the fundamentals have not changed again by what we will expect with the installation of additional aircraft which you see a strong backlog and a very strong pipeline and that’s going to be the key driver and -- of increased EBITDA. I think what's happened is that as a result of what we described on this call, it delays the need of that curve until those airline comes online -- come online and we can see the kind of operating leverage that we will expect from the increased growth as well as a reduced cost structure.

Yes. I’m just trying to get a sense for whether or not you can get back to sort of the target that we've been thinking about before the issues happened, not looking for exact guidance, but that’s helpful. Thank you. So let me just switch to the new -- to the business aviation side, new competition coming in, I think, Oak, I think you had mentioned a reference to that. And the 23% of the Jets in business aviation that have Wi-Fi, so therefore the big opportunity. The planes though have the -- the 77% of the business jets that aren't currently installed, what percentage is those would you say really are good candidates ultimately have Wi-Fi? I mean, aren't a lot of those planes, sub $1 million and therefore unlikely to ever wind up with Wi-Fi or could you give us a little bit more specifics on really how that we should be thinking about that opportunity set?

We think about 70% of that market is really addressable with one level of product or another. That's why we have different levels. We have L5 for the bigger planes, L3 for the lower smaller planes.

Got you. And last one for me is just, if you make no changes, you had mentioned that there would be some incremental capital required. Can you talk a little bit about exactly how should we be thinking about it? I mean is that 0 to 50 million, what is sort of a little bit to you or not much to you? How should we be thinking about that? And then, of course, I think you already talked a little bit about where you expected to come from. Growth capital to me means in incremental equity, but am I reading that the right way or is there some other sort of avenue that you might be able to address?

First of all, Lance, as a large shareholder, every piece of capital looks big to me. I think that I try to bound this by saying not a lot would be required if we just kept it at current course and speed. I’m not going to put a lot more around that to be honest. It's something that I don’t think it would be that hard to raise. In terms of growth capital, it really depends on the size of the opportunity. And so I’d like to reserve judgment until we get to our integrated business planning process to really bound that.

Fair enough. Thank you.

Thank you. Our next question comes from Paul Penney of Northland Capital. Your line is now open.

Good morning. Thanks for taking my call. On the ARPA, it unequivocally declined, both Rest of World and domestically you mentioned about '18. And so looking in an environment without the American deinstalls and with more and more airline directed models, do you expect that -- a reversion back to positive growth trajectory? And are you going to still keep with your guidance of doubling of ARPA by 2021?

So, first of all, ex those things, I think we would see a return to ARPA growth, Paul, absolutely. And then second of all, like I said at the beginning of the call, I wanted this management team to build our own numbers and when we’re done building our own numbers, we will communicate those. So we're not going to stick to what was communicated by prior management team.

Sounds great. I appreciate your honesty there. And going back to ZTE, in terms of you mentioned it's a -- it’s definitely a potential snag for the NextGen ATG. But what about the business unit upgrade system that’s going on currently? Does it affect your BA unit at all?

Yes. I didn't quite follow you. About what, the L3 or L5 product lines? Is that what you are asking?

Correct. For -- on the BA unit, does it -- how does it affect your BA unit, the ZTE supply issues?

It doesn’t. We have alternative suppliers in our supply chain there.

Okay, great. And then, lastly, you mentioned that you are looking to renegotiate some contracts, some existing contracts. How does that work in general like if you have existing contract, you’re looking to redo it and make it more favorable for you upfront? Is that -- how does that happen? Maybe you can just give us some more color on how that will transpire?

I don’t remember saying that. So -- where are you picking that quote up from? Oh, on new contracts?

Correct.

You say you can take a harder look at contracts in terms of how you place them and just maybe give more color on how you’re looking to change your former contracts to what you’re -- how you’re doing them today with airlines?

Paul, I want to be really clear. I’m not talking about changing any former contracts, Okay? So if that’s the question the answer is we’re not doing that. Second of all, in terms of how we’re going to structure future contracts, that’s going to be part of our business planning process and we will talk about that when we have more clarity. You’re talking about airline contracts or are you talking about suppliers, Paul? I’m a little unclear.

Airline contracts …

Okay.

… for connected planes.

Yes, okay. I think I’ve answered that.

Okay. Thank you.

Thank you. Our next question comes from Louie DiPalma of William Blair. Your line is now open.

Hi. Good morning, Oakleigh, Barry, and Varvara. With the airline directed model, based upon the way your existing contracts are structured, if airlines shift towards a free model in the future, is that going to be positive for ARPA relative to the former turnkey model?

Yes. Some of our most successful contracts are where the airline offers to treat its passengers. You have to remember, we get paid by the session or sometimes by the megabit, so the more usage the better for us.

Great. And Oakleigh, you made reference to consolidation, third-party capital and business development. Are you currently exploring anything partnership related as part of the formal review that you expect to conclude for the second quarter or earlier?

Actually the short-term business planning initiative does not really get into big strategic issues. It's all about getting the business operating well and take cost out of the business. Longer term strategic planning process will take longer to figure out. Now every lawyer in the room will make sure that I tell you that we would never comment on whether we are in a process or not in a process or the stage of a process or whether we’ve approached etcetera, etcetera. I will say this, which is that our Board has a duty to do what's best for shareholders and as a large shareholder I’m going to make sure they do that. So as we watch this, what we a game of thrones, play out over the next of years, we are very committed to charting a course that creates shareholder value -- for our shareholders. So I think that’s about all I can say on it right now, Louie.

Okay. And is there any update on your progress with different supplemental type certificates, specifically with the Boeing 787 with British Airways and Air Canada? And is there also -- do you reiterate your intention to announce on an Airbus line-fit win in the first half of this year? Thanks.

You know, Louie, I don't want to get over my skis on anything. So we’re plugging away on the 787s at Boeing and we’re making good progress there. We are making good progress with Airbus. Our relationship with the OEMs has really improved dramatically and we feel very positive about it. But I’m not going to get into specifics right now on a specific aircraft or OEMs.

Okay. And lastly for Barry, in the past, you guys have been very confident about the operating leverage associated with bandwidth pricing and the declines in future bandwidth pricing -- being positive for the Rest of the World margin. Can you reiterate at a high-level your view of the company's operating leverage for the Rest of the World business?

Yes. The fundamentals there are several. So one is that it really starts with more aircraft online, which as you know it is the primary driver of that. I think the second source of operating -- the source of operating leverage on expense side is that we've made a major investment in the satellite capacity to provide worldwide coverage. So that means that as we add more planes and add more revenue, the cost of delivering that service does not grow at all proportionally. So as we’ve talked about, for example, over the prior period the effective cost per band with -- have dropped by about 80% over that period of time. And that's the kind of leverage you see when you have more planes flying over that geography. So I think it's a combination of more planes, the leverage on the satellite system and then over time as the planes get more seasoned and the ARPA grows with that seasoning and that will add to the overall revenue picture.

Thanks, Barry.

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

Thanks. I just had one question on the cost of service in Q1 in commercial North America. The step up from Q4 which I guess is little over $9 million, how much of that is additional satellite expenses or less deferred airborne lease incentive? Can you just kind of break that down for us?

So the -- there was a meaningful increase in the satcom expenses from the quarter like we had talked about on the order of $5 million. So that's a big part of it and airborne lease activity actually went down during the period. So as we said on the last call, we are investing during this year to provide that satcom capacity in North America and that amount is about $25 million for the year as a whole.

So then it was $5 million in the first quarter, I guess, should we just expect a modest increase kind of sequentially going forward through this year or how should we think about cost of service in NA?

Yes, I think our satcom costs are actually coming in a little lower than we anticipated. Pricing keeps s coming down and we’ve been able to get some better deals as the years progressed here. So, we will probably end up spending a little bit less than satcom expense than we originally planned.

Thanks.

Thank you. Our next question comes from Robert Gutman of Guggenheim Partners. Your line is now open.

Hi. Thanks for taking the questions. So is it -- should we read into the 2Ku deicing issue and the ZTE issue, is it possible that is delays the line fit approval process because Boeing seems to be very focused on perfection in the supply chain? Secondly, when you talk about being more selective or disciplined on future deals, what are some of the levers there? And lastly on the airline directed model, is it the impact of a customer overpricing was less revenue to you? Is it -- are these contracts really purely consumption based on a per session or per month basis or is there a fixed charge element to it also?

So let's go back over to your questions. Question one was …

Deicing and ZTE, does that delay the line to product [indiscernible]?

ZTE, no. it doesn’t cause any line fit delay. First of all, the NextGen really not a line fit issue. It's not in commercial aviation until in the RJ market. So that's a long way off. In terms of the Mainline fleets, we’ve basically fixed 2Ku at this point. It would be fully fixed well before it would be online fit anyhow, and it hasn’t affected the speed of our line fit progress at all, okay? So second question was around giving away our negotiating strategy and future contracts. And I don't think I’m going to give away our negotiating strategy on future contracts. So the third question was -- what again?

On the airline directed model, you were impacted this quarter because you said the airline overpriced, so reduced revenue to you on a per session or per megabit basis. But how exposed are you to their -- what’s the balance of their control versus your stability?

Yes, so in the airline directed model they have pricing control. And in this particular case and because it's a large case, the way it was priced has not optimized demand. Generally, it has done a good -- had a very positive impact on demand. So if you believe the airlines want to anchor their customers and decrease penetration of IFC, then we’d be in a lot of risk. I personally think that airlines want to improve customer satisfaction and want to have high quality in-flight connectivity and want to have more penetration, at least that's what they all tell us. So generally I think that aligns their interest with ours which is driving usage or sessions. Typically we're getting paid by sessions and in some cases we may get paid by megabits. The deals do vary a lot depending on how the airline wants to structure them.

Is there a minimum associated with that, like a monthly minimum which takes [indiscernible]? Anything like that in some of these contracts?

I don't want to get into all of the nefarious details of different contracts because there is a lot of them and I might -- out of 22 contracts I might get a clause wrong. So -- but generally the way to think about it is that volume and usage are good for us.

Great. Thank you.

Thank you. And I’m showing no further questions in queue at this time. I’d like to turn the conference back over to Oakleigh Thorne, the company's CEO for closing remarks.

Thank you very much everybody for attending our call today. And I guess I'd like to finish off with a couple comments. First of all, yes, we are having our issues right now, but I really believe the future is bright for this company. Passengers want connectivity, airlines want to provide it. Providing connectivity at 36,000 feet and 600 mile per hour is a really hard thing to do when we're really good at it. And in fact I would say that we’re the best at it. So as long as you believe connectivity is going to grow, you got to believe that Gogo is going to have a positive future. I talked a lot today about our plan. We have -- once our plans complete, we intend to become more active on the investor relations front. And in that context, I look forward to continuing our dialogue, sharing our plans and ultimately sharing our results. Have a good day. Thank you.

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.