Good day, ladies and gentlemen, and welcome to the Gogo Inc. Second 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 for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Will Davis, Vice President of Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to Gogo's second 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 filed this morning and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K and 10-Q, and other documents we filed with the SEC. In addition, please note that the date of this conference call is August 8, 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'll present both GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measure in our second quarter earnings press 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 the website. After managements' remarks, we'll host a Q&A session with the financial community only. It's now my great pleasure to turn the call over to Oakleigh.

Thanks, Will. Good morning, everybody, and welcome to Gogo's second quarter 2018 earnings call. I'd actually like to start by welcoming Will Davis to his first Gogo quarterly earnings call. Will joined us as VP of Investor Relations in May. He brings nearly 20 years of wireless and communications infrastructure industry experience in investor relations, including with Nokia and as analyst on both the buy side and sell side. Most recently, Will was the SVP of Marketing and Chief of Staff of the combination of Lumos Networks and Spirit Communications. During his tenure at Lumos, the company's EBITDA multiple doubled and he played an active role is assessing ongoing strategic opportunities, including M&A and the potential sale of the company. We're glad to have Will on the Gogo team and let's hope he has the same magic touch here. So let me get started. We had a strong quarter with all three of our business segments coming in ahead of our expectations on almost every metric. Our consolidated EBITDA performance was especially strong at $19 million versus our expectation to $0, with roughly $4 million of outperformance coming from our BA division and $15 million from our CA division. The BA division outperformance demonstrates the continued strength of that business and was driven by stronger-than-expected revenue and a variety of cost saves. Of the CA-NA outperformance against expectations, roughly $6.5 million is timing and $8.5 million is a fundamental business improvement, including a $5 million BA [ph] service revenue and $3.5 million of cost saves. The Business Aviation segment had another record quarter, the new AVANCE L5 and L3 systems driving a 67% year-over-year increase in equipment sales, which portents very strong future high margin net service revenue growth and segment earnings hitting an all-time high of $36.7 million, up…

Thank you, Oak, and good morning, everyone. As Oak noted our Commercial Aviation division delivered solid results this quarter and our Business Aviation division surpassed our expectations with overall revenue of $74.2 million, up 28% from a year-ago. Some other key metrics worth noting are Gogo's consolidated revenue reached $227 million, up 32% year-over-year. Overall, service revenue grew 3% from 2Q 2017 driven primarily by strengthen our BA and CA-ROW segment. This growth would have been 14%, excluding effective American Airlines. Our adjusted EBITDA increased 90% from the prior period to $18.9 million, which is primarily attributable to record results in our BA segment. EBITDA for the quarter was better-than-expected due to higher-than-anticipated net service revenue and the timing of reduction - and reduction of operating expenses in CA and continuing over performance by BA. We believe our performance this quarter points to the true earnings power and strength of our underlying business. Provides reason for confidence that once the deicing cost are behind us, the major deinstallation program is complete, and we execute our Gogo 2020 action plan, we will be poised to accelerate our service revenue growth and generate positive returns for shareholders. Now let's take more deeply into the numbers. On a consolidated basis, higher equipment revenue generated nearly 90% of our overall revenue growth for the quarter. The adoption of ASC 606 for equipment shipments was a primary contributor, as were the strong equipment sales in Business Aviation. The adoption of ASC 606 lowered service by $4.5 million in the second quarter and increased equipment revenue by $31.4 million. Further details can be found in our 10-Q to be filed later today. Beginning in the first quarter of next year, the comparability issues driven by the implementation of ASC 606 will be largely eliminated. In CA-NA,…

Thanks, Barry. I appreciate it. I'd like to finish by thanking our employees for their hard work during these challenging times. Gogo is really fortunate to have an extremely talented and hardworking team and I'm proud to be part of that team. On a personal note, I speak for the management team, and I say that we're not going to let strategic options distract us. We're focused on building a great company, capable of delivering reliable value creation to our customers, employees and owners, whether that's in a public context or as part of some larger entity. Thank you for joining our call today. Barry, Will and I are now available for questions.

[Operator Instructions] Our first question comes from Louie DiPalma with William Blair. Your line is now open.

Hi, good morning, Oak, Barry, and Will.

Good morning, Louie. How you're doing?

Great. Third-party payer activity seems to be picking up. I think that is reflected in the 14% year-over-year service revenue increase for the CA division. Along those lines, I was wondering if the T-Mobile partnership has a specific end date. And if it does, are you in discussions with the other wireless carriers for them to potentially subsidize the service?

Yeah, T-Mobile is on an annual renewal, so it does have an end date. They budget, it's got part of their budgeting every year. And, yes, we are in discussions with all the wireless companies. T-Mobile relationship is going well. We're trying to - as I said in my comments, a lot of our software development now is going to create tools and recording for third-party payers to make us of a good distribution channel for them. So we're very focused on that and we see a lot of opportunity there.

Okay. And you mentioned that you're in a lot of strategic discussions. And I was wondering if any of these strategic discussions have advanced to the point that it would prevent insiders from purchasing stock.

Louie, we're not allowed to comment on anything vis-à-vis the status of strategic conversations.

Okay. But are you allowed to purchase stock?

That's a roundabout way of asking the same question. Well, done, Louie, but I'm not going to take the bait.

Okay. And my final question, have the deicing issues delayed your progress with line-fit with Airbus?

I don't think they have. No. We had, as you all know, we had this key asset, airline directive, which has delayed our service bulletin on the A330s and A340s. But we expect that to be clear by October or so, and to get on with the installation of those in the aftermarket using service bulletins. But that's the only issue affecting us within OEM right now.

And in general, is the timing for certain airframes to be line-fit on airbus still for next year?

Yeah, next year and the year after, it goes airframe by airframe. And you got to get through each program. So we're fighting our way through. I think we're doing well with airbus. We have a good relationship with them. But it just takes time and it's very hard to predict exactly when you're going to get it.

Great. Thanks, Oak.

Thank you, Louie.

Thank you, Louie.

Thank you. And our next question comes from Simon Flannery with Morgan Stanley. Your line is now open.

Hi, guys. This is Landon Park on for Simon. Just starting on the EBITDA guidance, can you help us understand what the cadence is going to look like in the second half? And is it going to be distributed between Q3 and Q4 or how low should we expect results to be in Q3 on the 2Ku issues?

Yeah, Landon, it's Barry. As I'm sure you inferred from the call and based on the guidance that it's largely dependent on how the deicing remediation cost come in, and as Oak outlined, a range of potential solutions there. So - but I think it's also fair to say that given the guidance range unchanged of $35 million to $45 million and the EBITDA for the first half of the year about $31 million, that we expect that to be meaningfully impacted particularly by the deicing remediation costs in the second half of the year. And exactly how that plays out between third and fourth quarter is I think difficult to call depending on the timing and nature of those solutions to be implemented.

Okay. That makes sense. And just another question on your commentary around the American de-installs. So I guess, you were calling out a 17% delta in the growth rate, correct, between the impact of the American de-installs?

It depends on which region you're talking about, which is, yes, so - yes, 3% declines versus a 14% improvement if that's what you're referring to. Yes, so that - a 17% differential.

And that's - I'm just trying to understand. So I think there has been 90 installs through the first half of the year. So that's only about 3% of the fleet. Can you - is the ARPA on those planes just much more substantial than on the remaining fleet?

It's a combination of several factors, Landon. So when we talk about that, we exclude American in total. So there are several factors that contribute to that. One is the de-installs, the second is the impact of 606 accounting, which of course, affected that also. And then, also the change in business terms with American Airlines that was made in conjunction with them going to the airline directed model. So we think it's most appropriate just to take American Airlines out and then look at it on an apples-to-apples basis.

Okay.

That changed in 2016, the contract negotiations that took under - [took and there is some directs and] [ph] back in 2016.

Okay. Great. That's very helpful. And then, just two last quick ones. Could you give us an update on the status of any renegotiations on any of the pledged 2Ku aircraft? And can you also give us any details on the recent Intelsat 37e contract that was signed?

The Intelsat contract is just part of our ongoing satcom expenses, nothing extraordinary there. And we are - we renew and make satellite purchases several times a quarter in different regions of the world. The - in terms of our discussions with airlines, we have discussions going with all the airlines that are in major installation programs or about to have the installation programs start about trying to reduce subsidy and return - in return for better terms on future service revenue and all those are taking place. None of them have stopped installing, so that's an encouraging sign and they haven't thrown us out of the office, so that's an encouraging sign. And we'll have more updates on that in future calls.

All right. Thank you.

Thank you. And our next question comes from Ric Prentiss with Raymond James. Your line is now open.

Thanks. Good morning, guys.

Good morning.

A couple of questions. You've mentioned a couple of times that you're thinking more movement to the airline directed model. How should we think about that flowing through the financial guidance? And then also on the take rate, I think, you mentioned ex-American, the take rate was 13%. Should we start thinking more and more about gross passenger opportunities and take rates and average revenue per sessions? Or how are you guys modeling internally, what metrics are you watching?

Yeah, first - Ric, on your first question about the move to AD and how that affects our guidance. So that is reflected in our guidance. So as you know, it's done under 606 and the assumption of more airlines moving to the airline directed model. So as you may recall at the end of last year, on the order of 90%, we're under the turnkey model and that will move to closer to 50% of the airlines by the end of this year. So that is comprehended in our guidance. In terms of how we buildup the model, we realized it, we probably did - do a better job of simplifying and clarifying those metrics to help the Street with that, Will, as I got that on his plate to continue to work with us on that. So - but, the way we look at it is, we do look at the opportunity in terms of passengers. We look at the relationship between take rate and what the average of new per session does, income. And the reason for that is with as 2Ku comes on and we are no longer bandwidth constraint they we were historically that we expect to see higher take rate, but also we expect that as we offer a range of services that the ARPS will come down. For example, you don't get paid as much for a session with a third-party wireless carrier. For example, it is just doing texting that as you do for a full session. So I think what will happen is that, and the way we model it, is how the - and we will see higher take rates offset by - a lower ARPS is based on a range of customer solutions.

And cost per session coming down, because a lot of these programs are surf limited and the amount of data you substantially have. So I mean, airline directed works for us, when it's done in the right terms. The American case was done in the right terms, so it hurt us there. But some of our very most successful airline relationships are airline directed. And so to us we're kind of neutral whether somebody is turnkey or airline directed.

Okay. And obviously, the take rate 13% ex-American airlines. I think, if I remember back on the July 13 call, you had some fairly conservative assumption on what take rates would do? Any update to your thoughts on where those might head then?

Well, that's one of the three levers we have to improve on the plan that Wall Street loves so much a month ago, and is to drive revenue. And so, our focus on user experience, our focus on third-party payers, are all designed to improve take rates, obviously lower ARPS. But the net is to have higher revenue and so we think that growth rate will drive more revenue. So the answer to your question simply, we'll come out with better guidance around future average revenue per session, when we get a little more clarity around where these take rates are going and what the ARPS is and what the deals are that we are doing with third-party payers and airlines to travel.

And just to put a final point on your comment, Ric, as you pointed out that we had 13% take rate this quarter without American, as we said on the call last time that the assumption that was in our model out at the end of the planning horizons points to - is 4.6%. So you can see why we feel like those assumptions were conservative and it really was done to establish a - we describe as a cash management baseline scenario rather than what we've considered to be a forecast.

Exactly. And final one for me. The G&A costs were noticeably lower in 2Q than where they have been previously. Is that some benefit of the programs that you are putting in place already or should we think about that as an anomaly. What should we think about that G&A line on a go forward basis?

Yeah, we definitely see the overall cost structure coming down, as you know about it, almost 20% over the next 10 quarters or so. And that will come across the whole operating cost structure. It's heavily in the technology and the operations side of the house, as we work our way through the programs getting STCs in place, for example, getting - going through the software development that we're doing. We're reducing sales and marketing, as we look at the opportunities to be able to do that. So anyway, yes, it's an approximately $75 million reduction in that combined set of expenses during that period of time. So it will start in the second half of this year. There is a - and the order of $15 million benefit from the Gogo 2020 plan that starts this year, and then increases in 2019.

Yeah, to answer the question directly though, there was a couple of millions of saves in Q2 around sales and marketing and things like that, that were part of the IBP plan. There were also some steps in Q2, that's part of the plan that may have offset that.

Great. Thanks, guys.

Thank you. And our next question comes from Philip Cusick with JPMorgan. Your line is now open.

Hi, this is Sebastiano on for Phil. Thanks for taking the question. Just a more industry level, just what are the pace of RFP conversations, I guess, across the industry? And have you seen a demonstrable change in the level of conversations in light of some of the deicing 2Ku woes at Gogo?

No. I said on the first quarter call, we never seen as many deals as we were seeing at that time. And actually all those deals continue, and we're in the process of trying to win some of them. We haven't lost any, we have tried to move all of our bids, if you will, closer to the Gogo 2020 model, in terms of being revenue neutral or maybe profitable in the early stages as opposed to highly subsidized. But airlines, I think, are being more deliberative, they - obviously, 2Ku looks great to them. And they - there are concerns about us financially and about our competitors as well. And so airlines are taking their time making decisions. That's for sure.

Great. And then following-up, you made the comment, I think, Oak, in your prepared remarks that just ZTE seems to be progressing, but you've got to take a step back on whether or not to proceed with that Next-Gen ATG program? And what are some of the different options that you're considering or potential alternatives? Just give us any color on that, would be great?

Yeah. Well, when I came in here one of the things I wanted to do was part of the Gogo 2020 plan was add discipline around our business processes and that includes our new product introduction process. So like any product it has to go through our gating process - our NPI gating process. So we have upcoming evaluations that it needs to get approved, especially an investment like this, which we spend quite a bit of money on it already in R&D. But we've got, obviously, network deployment in front of us, which is a pretty big CapEx expense. So before we proceed with that, it's got to get through our gating program and that includes one test around efficiency and effectiveness and whether it's going to work. 2.4 is unlicensed spectrum and there are still questions we have about the noise floor in that spectrum and how effective this network will be now and in the future. So it's got to pass that hurdle as part of one gate, and it has to pass commercial hurdles as well. And then, if it passes all those things we'll approve it, and we'll go ahead and build it. There are other alternatives if that does not pass the gate, that we have started evaluating and those include hybrid ATG and satellite systems, and trying to find some license spectrum somewhere. So, there are a number of other alternatives for getting a, to what I would call high-speed streaming-class product to the regional jet and large BA market. But we shouldn't start speculating on those now as we're still evaluating Next-Gen ATG.

And then, just quickly a follow up on that, does your cash burn and CapEx kind of commentary regard - long-term it's the Gogo 2020 plan, does that still contemplate some level of network build related to Next-Gen ATG? Is that still in the numbers or not necessarily at this point?

Yeah, there is investment in those numbers for the follow-on network with ATG. So that is in there. Exactly what form it takes is as we determine as Oak outlined, but there is money in the plan to accommodate that.

Thank you very much, Barry.

Yeah, when we talked about it in the last call, we described that as our LTE upgrade plan. So there is a chunk of dollars set aside for ATG.

Great. Thank you.

Thank you. And our next question comes from Lance Vitanza with Cowen. Your line is now open.

Hi, thanks guys. I wanted to start back on take rates and capacity. And as someone pointed out, you're already kind of beyond, ex-American, and you're beyond what you sort of laid out for 2022. And I understand that that wasn't guidance per se. But my contention is that, if the product capacity is there, that take rates are going to be three times what you guys are seeing now, and so my question is, when we get to 2022, are you going to be able to offer the same kind of quality product to satisfy that kind of demand or is the bound going to be, there is just not enough capacity to the plane, even in 2Ku to kind of enable those types of take rates?

Yeah, there is going to be capacity. Yeah, I mean, we've designed 2Ku to be able to go up. At this point, our next bottleneck is around 400 megabits per second. And the - what you need to get there is just provide more satellite capacity basically. And if you talk to the satellite companies, they're all going to be putting up a lot more capacity over the next couple of years and they view this as one of their growth market. So we think based on our conversations with satcom companies, there is going to be plentiful bandwidth. It's going to be getting cheaper and cheaper all the time. And 2Ku is well positioned to deliver that bandwidth.

Okay. Thanks. So next on the EBITDA in the quarter, I think I heard you say early on that there was a favorable $6.5 million kind of timing related item embedded in that $19 million of EBITDA. So, I guess, should we think in terms of $12.5 million of kind of normalized EBITDA? Is that sort of the right way to think about the quarter?

Yeah, yeah, that's right. I think the timing there…

I mean, and…

Yeah, just to go over it a little more, just to kind of reinforce what Oak had mentioned on the call, so the $19 million versus the expectation of basically near 0, about $4 million of that was from stronger BA performance, $15 million of that was from CA. And there was about $6.5 million that was timing related. So - and the others were ongoing or - call it permanent differences. So, yes, based on that quarter, if you take the timing out, that would be the - that's probably the appropriate adjustment for that.

And, I mean, the $12.5 million is still well ahead of your internal expectations I would imagine.

Yes, it was. It was.

But as we said on the previous call, we expected it to be extremely low in the second quarter. So it exceeded our expectations for the second quarter.

Great. And then, just lastly for me, backlog in ZTE, can you give us a sense for when we might actually expect the legislation to be enacted and signed into law, just so that we can kind of mark our calendars and continue to follow that?

You have to ask the President, because it's now on his desk. And I think…

It's been voted. It's signed - it's been voted and it's sitting on the President's desk. Okay. I missed that. Thank you.

Yeah, it's been approved. Just the process so you - to be totally clear is that Senate Defense Authorization bill had ZTE language in it, House Authorization bill did not. Those two things go to Conference Committee. Conference Committee [Technical Difficulty] language that allow ZTE to do business with American companies, but ZTE cannot sell to the American government, that's what the language said. And that bill has gone back to both the House and Senate and been approved, and now sits on the President's desk. And the bill that has everything that the President wanted in it. So I think the - and he said, he's going to sign them.

So this should be imminent then. Thank you.

Yeah, when he gets back from vacation.

All right, thanks, guys. That's it for me.

Thank you.

Thank you. And our next question comes from Robert Gutman with Guggenheim. Your line is now open.

Hi, thanks for taking the question. So does the $113,000 ARPA reported in North America reflect turnkey revenue share or is this an adjusted number? In other words, does it tie to actual revenue going forward? Secondly, how much extraordinary cost or deicing cost was in NA in the second quarter? And, lastly, if you could give us some commentary, looking forward on CapEx, because you've noted materially lower CapEx? Is there any way to sort of provide some parameters or way to think about that longer term?

Sure, Rob. So on your first question about ARPA, that is net ARPA, so that excludes the rev share. So that's we believe a more accurate way to report it now, because it takes out the effect of whether an airline is on the airline directed model or turnkey, so that's net. With regard to deicing cost, we have - we've incurred about $16 million in expenses in the first half of the year related to that, about $10 million at the expense line, about $6 million in CapEx. So - and there was about $7.5 million of that in the second quarter. So that's direct answer to your question.

Yeah, thanks. And CapEx longer-term, cash CapEx?

Yeah, CapEx longer-term, I mean, I - we do see it coming down pretty meaningfully and that's a big driver of the improvement in the free cash flow. So as we talked about, we expect free flow to improve by over $100 million year-over-year for each of the next two years. So as we work our way through the airline installation programs for example, that's a driver of that and also we're using the subsidies on that as an example.

Okay.

Great. Thank you.

Okay. Thank you, everybody. We have completed our hour-long conference call. Thank you for joining the second quarter 2018 Gogo conference call. I'm reachable during the course of today and tomorrow for follow-up questions. And thank you and have a nice day.

Ladies and gentlemen, this does conclude your program for today, and you may all disconnect. Everyone, have a great day.