Good day, ladies and gentlemen and welcome to the Q3 2018 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [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 third quarter 2018 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 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 November 6, 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 included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measure in our third quarter earnings press release. This call is being broadcast on the Internet and 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 will host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks Will. Good morning, everyone. We had another strong quarter with all three of our business segments coming in ahead of our expectations on every financial metric and we made good progress on our Gogo 2020 plan as evidenced by our strong cost control in the quarter. Our consolidated EBITDA performance was especially strong at $21 million versus our expectations of around $6 million, with roughly $11 million of the outperformance coming from our CA-NA business and the balance almost evenly split between CA Rest of World and Business Aviation. On the revenue side, the biggest drivers of outperformance were third-party payer programs. And on the cost side, we had lower cost of service driven by satcom savings and lower OpEx driven by personnel costs, lower performance-related penalties and $3 million of timing and ED&D spend. Maybe most importantly, our cash and cash equivalents ended the quarter $8 million ahead of plan. I want to thank the Gogo team for working hard to make these results happen and for working even harder to make sure we meet or exceed our customers’ expectations and build Gogo into a valuable partner of profitable company in the future. We have been hard at work improving our Gogo 2020 plan and that’s the long-term business plan we discussed at the conclusion of our integrated business planning process in July. As we stated at that time, we are very conservative on revenue projections and satcom spend projections in that plan. Since our second quarter call, we have adjusted the plan to a) reflect more realistic revenue projections based on our current revenue trends, b) reflect more realistic satcom spending based on current offers we are receiving from our satcom vendors, and c) reflect the current state of our airline subsidy renegotiations. The enhanced plan called…

Thanks, Oak and good morning everyone. Let’s jump right into the numbers. Gogo delivered third quarter adjusted EBITDA of over $21 million well ahead of expectations. Our Business Aviation division continued its strong momentum, with revenue of $73.6 million, up 22% year-over-year and our CA-NA segment delivered 18% service revenue growth, excluding American Airlines. I will highlight a few metrics for the quarter before reviewing the performance of our three business segments. Adjusted EBITDA of $21 million was up 63% from a year ago and meaningfully exceeded expectations. The strong performance was primarily due to higher CA service revenue with the recovery of 2Ku performance, lower-than-expected satcom costs and continued strong momentum in BA. Our costs to remediate the icing were also lower than anticipated and there was a benefit of approximately $3 million in timing of expenses, which we now expect to occur in the fourth quarter. It’s also worth noting that our quarterly results include absorbing a $1.5 million severance charge related to headcount reductions in July. Gogo’s consolidated revenue reached $217 million, up 26% year-over-year, with higher equipment revenue generating nearly 85% of our overall consolidated revenue growth in the third quarter. The adoption of the new revenue recognition standard, ASC 606, was the primary contributor to this increased equipment revenue. Strong BA equipment sales were also a smaller factor on a consolidated basis. The adoption of ASC 606 increased equipment revenue by $31.4 million and reduced service revenue by $4.5 million in the third quarter. Consolidated service revenue grew 5% from a year ago driven primarily by strength in BA and at CA-ROW. Net ARPA in CA-NA increased nearly 7% in the third quarter from the prior year period reversing the 1% year-over-year decline we experienced last quarter. Excluding American Airlines, CA-NA net ARPA increased 16%…

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

Oak, Barry and Will, good morning.

Good morning.

You previously said that the cash balance could dip in 2021 to negative $50 million to $75 million and now you indicated that you expect that it should stay in positive territory does this modified outlook assume any positive impact from renegotiated airline contracts?

Yes. Louie you have got that right that we had projected a negative $50 million to $75 million balance and it’s projected to be in cash positive territory now. We have assumed some renegotiations. We are very close to those. We are in active conversations and I have – are making meaningfully – meaningful progress on those. As Oak mentioned there is certainly a quid pro quo here by us getting more cash upfront and with the trade-off of providing – having that come out of our future revenues. But we are making good progress there. I think the airlines understand that. We have identified deals that are mutually beneficial and feel good about the progress we are making now.

Thanks Barry.

Okay. Louie that reflects the current status of those negotiations is what I would say.

Okay. And in the press release you suggested strong EBITDA growth for 2019 and I was wondering if you have any sense of how much of the investments this year for STCs, service bulletins, deicing and other programs would you expect to not recur in 2019 and in other words I am trying to get a sense of whether they are going to be easy comps for 2019 on the cost side?

Yes. Louie just to frame that question a little bit as you know from our previous call, we said we expected to reduce OpEx excluding Satcom by nearly 20% in the 10 quarters from mid-2018 through the end of 2020. That represents about a $75 million reduction, a very meaningful portion of those reductions, in fact more than half we would expect to come in 2019 as we see some of these key program investments rolling off. And those include STCs and like I had outlined. So we would expect to see a meaningful contribution to increase EBITDA on 2019 from those – from the lower cost structure.

Great. And Oakleigh, do you have any thoughts on the Inmarsat, Panasonic partnership?

Yes. I got a lot of thoughts on it. I guess the impact on us is, I think it will depress Ku pricing somewhat as Panasonic will be pulling out of the Ku market, so that’s a good one for us. I think that the way we view this competitively is Panasonic has been very challenged running its network and as quite poor service. And they are basically are giving up on running a working and buying Inmarsat service. For Inmarsat, Panasonic is now another reseller. They have got several other resellers as well, so this not two way exclusive. So it’s interesting industry development. We think it’s relatively positive for us from a Ku supply perspective. And I think it also created some confusion in the market around where Panasonic and Inmarsat each going and that helps us in the sales process.

Thanks.

Thanks Louie.

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

Great. Thank you. You have got I think 908 – 98 2Ku planes on installed now, can you just remind us of where you stand on the backlog and how should we think about the install raise in 2019, should we be in that 450 out of 500 or should you be able to accelerate that. And then I think last quarter, Oakley you have talked about the Board asking you to evaluate certain approaches on the strategic side I was wondering if you had any updates on that? Thanks.

Yes. So Simon we are not going to get into guidance around the exact number of installs for next year. But I will give you a little bit of color. First of all, we have delayed installs from this year as we have talked about which will feather into next year. And then we already had a pretty good install backlog going into next year. So I mean, I would expect to run at about the same price – pace maybe even a little higher next year than we have this year. We also I would say, we’ve got lot of the regulatory approvals behind us on a lot of things that delayed things this year. So that should also help next year’s cadence. In terms of the strategic options, I said at the beginning of the call that we really weren’t going to talk about those, but I'll just reiterate things to where they stand. As we noted before we’ve had a number of strategic inbounds. The Board asked management to pursue those and investigate them further and negotiate them et cetera, and I would say we’re still in the middle of a number of strategic conversations and we’ll have comment when we have progress that we can talk about.

Okay. And what about – on the rest of the world, what about the pipeline of new aircraft awards, new airlines, how – is that active at this point or is that are we in a bit of a low?

It’s been very active. I think deals have been slow to be awarded this year. I think airlines are concerned about all the vendors to be honest. So they’re being very careful about their selections. We remain active in all the airline deals that I was very excited about on the Q2 call. So – and we’ve seen more deals come into the pipeline. I think that if we can make the market feel better about us from a financial security perspective either through something strategic or refinancing of some kind, I think that will actually help break a lot of deals in our favor, because 2Ku itself is flying really well, the reliability is very good, the references from other airlines are very good. So I think we’ve got positive traction in – on the products side and we just need to reinforce that we’re stable from the financial side as a company and I think we’ll get a couple of those coming our way.

Okay. Thank you.

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

Hey, guys. Thanks. Oak, recognizing that you don’t want to spend much time on refinancing or strategic. Can you tell us if there are options that you’ve ruled out in either area? Thanks.

Are there options we’ve ruled out in other area. I don’t think we’ve explicitly ruled anything out. Barry, can you –

Well we – on the strategic front as Oak mentioned we’re pursuing those actively. On the financial front I would say we've evaluated a broad range of alternatives there. As you know you’ll get a lot of ideas coming your way in the situation like this and that we have really taken them seriously. So I'd say that as I mentioned in the script, we clearly recognized the importance of addressing the converts before they go mature and that we’re very committed to doing that certainly on that timetable or ahead of it. So we have taken it very seriously and are tracking along with some of those alternatives.

Okay. Thanks. And second, can you quantify any of the EBITDA benefit impact from slower installs this year?

I don’t think we have that handy, but I would say that just because the installs been delayed doesn’t always mean we've avoided the EBITDA impact of it, because we’re working on certifications, FTCs et cetera. So Barry do we have a number around –

No. And of that EBITDA as Oak said is less affected, it's more certainly on the CapEx side. So you can kind of play through the math on our average installation cost. And so – yes, I won’t give you the exact number, but it's a relatively one-for-one impact on cash as you delay those not completely, but if that is the case. Although from the other – the countervailing piece of that is the inventory built. So you saw that we built inventory and it’s an anticipation of those. So I’d guess that's the way I would describe it as a slip on the installation side, but muted by inventory that’s bought in advance of that.

Got it. Thank you.

Thanks, Phil.

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

Hi, guys. Thanks for taking the questions. I had two. The first is, could you discuss, I mean, what you're seeing on the customer satisfaction – customer satisfaction metrics that I think in the past you talked about looking at some – looking at the metrics differently or looking at different metrics, and I'm wondering, if you could update on how that’s proceeding? And then a question about, I guess, the underlying trends in the business seem pretty good when you ex out American, I understand why that was an anomaly. But what gives you comfort as you look forward that a year from now we won’t be faced with another such anomaly, where perhaps you were to lose another airline partner and we sort of start the cycle all over again?

Okay. So two questions. Customer satisfactions grown a lot over the years as we measure it. And the number of our airline partners measure net promoter scores and those have grown dramatically since the second quarter. So we’re not going to share exact data with you, but that’s the overall trend. The in-cabin experience is a new metric we started and you’re right to point that out, that's also improved dramatically with things like the captive portal implementation that I talked about earlier in the call, and we think that’s another one of the drivers of customer satisfaction. So the in-cabin measures are really trying to correlate performance of the system in the cabin, for instance, with page load times, browse fees et cetera with customer satisfaction. And we do see that correlation and we see improvement in both. In terms of deals and losing another customer, the big sort of our clients would have with us today is if they have what I call shiny new product clauses like a written American originally had. And if there’s a product that comes along is dramatically better than what we offer, airlines want the ability to be able to switch because it’s going to damage their business. So you can read that clause in our Delta contract, which is a public document, you can find it by going to our 10-Q or 10-K and just linking to it. And they have to prove it is a much better product and it’s going to harm their business if they don't switch. And they and some others would have that kind of clause in their contract. The big thing to remember though is that American, the contract with them was done under a lot of duress in the middle of 2016 I believe when they decided they wouldn’t award us the 550 aircraft. You might remember that broke in the middle of a high-yield bond offering behind the – between the actual settlement of the pricing and the actual close that blew up this high-yield deal, I mean, there was a lot of duress in that period. The company agreed to a predetermined pricing structure for airlines directed with American and they gave American the right to trigger that whenever they wanted. And so American decided to trigger it on January 1 of this year and that's had a pretty negative impact on revenue. No other airline out there today has that unilateral right. So that I view as an unusual circumstance and one that won’t repeat. We do have the obligation with other airlines to negotiate going to airline directed in good faith and we would obviously do so, but we wouldn't be forced to do something that was extremely negative for us under the current contract terms. So those are why we kind of think that the Americans are one-off and we don’t expect to see another repeat of this performance going forward.

Thank you.

Operator, we have time for one more question, please.

Understood. Our next question comes from Ric Prentiss with Raymond James. Your line is now open.

Hey guys. This is [indiscernible] on for Ric. I know you guys noted the gap between kind of vintage and new aircraft ARPA for CA-ROW. How do you think about the time in ramping those new installs and ultimately converting that gap?

That's not a one week or a two-month process. We’ve got to get those fleets installed July 1 which will sort of drag into next year. And then – because the airlines don't really like to promote the product much until a fleet is fully installed. So I think that’s kind of a 2-year process to try and get them up to that level of performance.

Great. Thank you.

Yes. And just to add to that, with our new airlines coming on all the time that we would expect to see that dilution from them as they do come on. But the good news is the kind of airlines we have been adding that Oak mentioned really some of the marquee names in Rest of the World, they have the kinds of planes and routes and passengers that we would expect to see attractive take rates from. So I think that's an important consideration when you really look at the quality of those 500 aircraft that represented by those airlines in terms of our ability to drive higher engagement rate and drive higher ARPA.

Great. Thanks, guys.

Thanks Chase.

Thank you. And I am showing no further questions in the queue at this time. I would like to turn the call back over to Will Davis for any closing remarks.

Thank you everyone for joining the third quarter 2018 Gogo conference call. The call is now completed. Please feel free to contact me for any follow-up questions. Thank you. Have a nice day.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your program and you may all disconnect. Everyone have a great day.