Good day, ladies and gentlemen and welcome to the Fourth Quarter 2018 Gogo Incorporated 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 call may be recorded. I would now like to introduce your host for today’s conference, Will Davis, Vice President, Investor Relations. Sir, you may begin.

Thank you and good morning everyone. Welcome to Gogo’s fourth 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 have filed with the SEC. In addition, please note that the date of this conference call is February 21, 2019. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. We included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our fourth 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’ comments 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. I'm only a few weeks shy of my first anniversary serving as CEO and though this past year has largely been focused on fixing operational issues, I thought I'd take a minute to provide an overview of the fundamental promise of our business and what attracted me to Gogo as an early investor. We provide broadband connectivity products and services for the aviation industry and monetize that bandwidth to passenger connectivity, in-flight entertainment connected aircraft solutions. We have a simple business model, to provide connectivity products and services that grow revenue as in-flight bandwidth consumption growth. At this point, I don't think there's much argument about the fact that airborne bandwidth consumption is growing and will continue to do so. Passengers expect it, aircraft operators want it, and aircraft owners are committed to providing it. We provide connectivity to two solutions; satellite solutions for larger aircraft and air-to-ground solutions for smaller aircraft. The satellite echo system is going through unprecedented change, so we serve the global large jet market with an open architecture that can adapt to technology innovations that come to market, that improve capacity, lower costs, enhance reliability and expand coverage. Over the next few years we see tremendous advances coming in the satellite world and in the Ku satellite world in particular. We believe our 2Ku platform is uniquely positioned to capitalize on those advances. In the air-to-ground world we have a competitive advantage by owning and operating our own spectrum which we leverage through a nationwide network of towers and the state-of-the-art network operation center to provide the highest quality service available. We will enhance that capacity to additional bandwidth in order to continue improving the quality of our product. Today, Gogo is the largest provider of in-flight connectivity in both…

Thank you and good morning everyone. Before reviewing our detailed financial results, I'd like to build on Oak’s comments by offering some additional perspective on the year. In summary, 2018 was a year characterized by exceptionally strong performance from BA, significant progress in addressing the operational challenges in CA, and taking important steps to strengthen our balance sheet. We made real progress during the year on all of the critical issues we faced resulting in higher adjusted EBITDA and a much stronger ending cash position than expected earlier in the year. These improvements also provide the foundation for significant free cash flow improvement in 2019 and beyond. Let me provide the data behind these observations. Business Aviation had its best year ever including revenue growth of 21%, segment profit growth of 41% to $140 million and record segment profit margins of 48%. As Oak described in detail, 2Ku has performed exceptionally well through thousands of flights receiving de-icing. This has elevated CA service revenue and avoided the need for approximately $10 million in additional remediation costs that may have been required if our initial modification plan did not work as expected. Our cost savings plans also began to yield results during the quarter. In addition to these operational improvements, we took a major step toward addressing our balance sheet during the quarter by extending the maturity on $200 million of our convertible notes. While the transaction was executed in a very difficult capital markets environment, it was meaningfully oversubscribed and enabled us to add $29 million in cash to the balance sheet. These underlying operational improvements and balance sheet actions drove two key results in the fourth quarter. First, adjusted EBITDA of $19 million for the quarter and $71 million for the year surpassed even the $60 million top end…

Thank you. [Operator Instructions] Your first question comes from Philip Cusick with JP Morgan. Your line is open.

Hey guys, thanks. First Oak, can you dig in more to what discussions look like with the current pipeline of airlines around the world and how is your new customer discussions changed with your increased discipline versus where things were a year ago?

Yes, I think airlines are being more cautious around the world as they go through these processes because a lot of them have been burned by bad suppliers to be honest. And so they're going through more rigorous processes and those are taking more time. I think that so far we've not been bounced out of a deal because of our sticking to our equipment pricing discipline. And I think that's generally true across the industry. If you look at the competitors in the industry everybody's balance sheet is damaged and I don't think anybody can really afford to subsidize equipment much anymore. So I think that the industry was relieved when we came out with that policy and we're starting to see that play out in the market.

Okay. Thanks. And then can you also give us some more thoughts on next-gen ATG? You've been much less willing to invest in this than the company was a year ago. How do you think about it today and what do you think about the competitive landscape as well?

Sure. So we are cognizant obviously of the Government's concern about ZTE as a security concern. The current manifestation of that is the rumored executive order out of the White House that would - we don't know what it would do, but one end of the spectrum said it would just ban 5G. Those companies that were being part of any 5G initiatives, some people say no it might ban current networks from using their existing ZTE network equipment rather. So we have to be very cautious about that and we've been working on a next-gen solution for a long time. We have a lot of other alternatives. So at this point we are waiting to see what happens to ZTE, but teeing up other approaches. So we're going be ready to bring a product out either way. In terms of competition in the ATG space, there is SmartSky of course we follow them very, very closely. We are not - we don't take anything for granted. They have some real issues. First of all they don't have a backup network, so they're going to use only unlicensed spectrums. Users are going to lose their sessions when they fly over densely populated areas and there's interference from ground use of the 2.4 spectrum. Second, they have a real issue in terms of getting the right distance from the towers to the aircraft. We follow where they fly. We follow all their demo flights. We know how they're showing people what works and generally they're sticking pretty close to a couple of towers and they're staying at low altitude and that's easy to do. Like in golf they say, drive for show, putt for dough. Well and ATG networks demo for show and you build a nationwide network for dough. And…

Are you still convinced that you have a moat around that RJ market that a smaller satellite antenna footprint isn't going to be a threat?

Well, if there's going be a smaller satellite footprint in the regional market we're going be there first. Usually we follow ESA [ph] invest developments very, very closely, yes because we think it would be probably an electronically shareable antenna with a relatively small footprint, it would have to be a small footprint. So we would love to bring that product to market, but we're still waiting for technical feasibility in ESA [ph] development world.

Thanks Oak.

Okay, next question please?

Your next question comes from Paul Penney with Northland Capital. Your line is open.

Good morning guys. Thanks for taking my question. The airline direct to turnkey transition, can you get more clarity on what is driving that trends and will it reverse or stop the deceleration in ARPA and what are the potential effects on cash flows and margins?

Yes, I'll leave the cash flows and margins to Barry, but I think I had pointed out before that some airlines might figure out, it's better to get a check than write a check and I think that's the primary motive here. So if the airline takes on the airline directed they've got costs flowing through their income statement and they have to manage that as opposed to just getting a check for us. So I think that's the primary motive. In terms of cash flow it's neutral over the long-term. In terms of ARPA I think it's neutral as well Barry?

Yes, I think Oak captured it well. It primarily affects equipment revenue. So we talked about, so the turnkey, shifting to the turnkey model reduces the equipment revenue because it's not accounted for along those lines. Over the longer term it will actually increase service revenue because if it's going through the airline directed model what happens is that you allocate the revenue over the life of the contract between equipment and service and so the service revenue under that airline directed model is muted as a result. So they see some modest improvement in service revenue as they make that switch. But the key point here is that it's cash flow neutral.

Okay, great. And one more, the graph on your impressive BA results once again, but can you clarify the breakdown of the installed AVANCE units? How many represent an upgrade of current ATG customers versus how many are new customers and how long on average did your customers have the old ATG system before upgrade?

Yes, it's a very heavily skewed to new customers actually, it's 65%, 70% new customers. And I couldn't tell you of the 30% 355 that were old customers how long they had their ETT [ph] systems. We can try and find that data for you, but I don't have it.

Okay, great. Thanks guys, I appreciate it.

Thank you, Paul.

Next question please?

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

Hi yes, this is Linden Park [ph] on for Simon. I was just wondering if you could maybe talk about the underlying ARPA expectations embedded in the guidance and maybe where you think on ROW where do you think that number could bottom out and when do you expect to return to positive growth in the North America segment?

Yes, so let me start with the last part of that first on North America and then go to the ROW. In North America the reason we show it differently between the overall business and excluding the impact of the DN [ph] selling airline we've talked about, is you can see that the underlying growth, is - there is significant growth in the underlying take rates. Over time we expect that to continue to grow as the airlines move to expand the distribution across the plane. The ARPA impact was relatively muted last year for those reasons and importantly the deinstalls are from high value, high ARPA planes on the old ATG network. So they will take some time for as those come off for that to be offset in North America, but we expect that to begin to really grow again in a couple of years. With regard to the Rest of World, it will still decline because of the addition of new aircraft and we talked about the percentage of aircraft on our new fleets has gone from 12% to 40% over the last year because of the strong backlog in the number of installs there. So we expect that to continue to decline over the next couple of years, but then we expect it to increase. But it's really important to look at it on an airline by airline basis from the old airlines versus the new and the key part about this is that there's some very high quality airlines coming online that Oak talked about, the European based airlines for example, the Cathays of the world and we think that the economics of those aircraft are going to be very attractive as they come online and get seasoned.

And that, the Rest of World the old aircraft are around $200,000 to $210,000 a year in ARPA and that stays about flat. Those planes are very heavily penetrated in terms of usage and the new fleets are about $84,000 ARPA in 2018 and that gets up into the high 90s in 2019. So there's growth there. So overall I'd expect ARPA growth in Rest of World this coming year and I think probably the real return to ARPA growth in North America is like 2020.

Okay. That's helpful. And then just one last one, I think the last quarter you guys had talked about providing a more formal update on your 2020 plus Gogo plan. Should we expect an update on that in the coming quarters or how should we be thinking about the different factors you mentioned in terms of airline renegotiations and satcom costs and all that?

Yes. So there are really three drivers we talked about in the 2020 plan. One was take rates and in that you'll remember that we expected a take rate of 12.6% in 2022 while we're at 12.9% now. So we're well ahead of take rate, on take rates and after the deinstallations are done with American I think we're going to be way, way ahead of the 2020+ plan in terms of service revenue, so that's been a positive. Satcom is also a major positive contributor, you'll see it coming through in this year's guidance. And as we project out there's a big improvement from that in the 2020+ plan. And then finally, there were the airline subsidies and renegotiations. There were two of those, they are in renegotiation now. We don't - we have not completed any of those renegotiations. One of them appears to be getting pretty close to finished and that will improve our cash flow further in the 2020+ plan. So all those things are driving things the right way and we expect, we had targeted $200 million for EBITDA in 2022 and I think we believe now that that number will be substantially higher.

Do you expect to put a formal, a more formal target around that or not so much?

I think what we'll do is let the year unfold a little bit and at some point it may make sense to do that. But I think the key takeaway here is that with the strengthening performance on the operating slot side and underlying business that we are certainly more sanguine about the future than we were in the middle of last year.

We have time for one more question please?

Thank you. And your final question will come from Louie DiPalma with William Blair. Your line is open.

Good morning Oak, Barry and Will. How are you guys?

Good, Louie how are you doing?

You guys did a great job of burying the lead here. Do you have any more color on the term sheet negotiations that you expect to execute with strategics before Q1 and does it involve selling an equity stake in the commercial division or would it be for an equity stake for the entire company? And secondly, did you say that there are multiple strategics involved or did you say that there's just one strategic involved?

Yes, Louie let me let me comment to the degree we can on that. We are in advanced discussions with really a targeted set of select investors that are strategic and financial. As Oak mentioned, this does not involve the sale of one of the divisions. It's a different approach where the capital would come into the company. And really the objective of that is primarily to address the $162 million stub and really get the - take the next major step in the balance sheet. So those are the primary things that we are looking at. Of the things that we are looking at, most of them are less dilutive than the deal that we did last year. And so we'll have to see how that plays out, but we're very actively engaged in that process and as I mentioned are committed to getting that done by early May on our first quarter earnings call.

Okay. Thanks Barry, and you announced an improved cash burn profile. Are you able to use some existing cash to refinance the $162 million stub or in other words, how much new cash do you need to raise to refinance that's stub?

Yes, as we said Louie, our cash outlook has improved substantially from where it was last summer. At that point we forecasted a negative $50 million to $75 million cash balance. We're in positive territory. So we've said that we don't have to raise the level of buffer capital that we thinking about and we may not have to raise any. But I think it's fair to say that what we're really looking to do is to raise enough money to address the convert and then maintain that the cash for operations.

Okay. And a final one for Oak, line fit operability over the past six years seems to have superseded quality of service and even price in many instances in terms of winning deals. You discussed Boeing lines fit that offer ability potentially later this year and Airbus next year. What remaining milestones are involved in this process to achieve line fit offer ability?

Well, it will differ at both OEMs and it would take me an hour to explain the process at both of them, but we are getting down to the final strokes on those processes. It is difference by fleet at both OEMs also some of them are – some are fleet oriented, some of them are more corporate wise. So we have worked very tightly in conjunction with the OEMs. The fact that we have service bulletins with them both now for a lot of the major fleets and that they are installing our equipment today under those service bureaus, bolt-on immediately after the equipment comes out of the factory if you will. It bodes very well for line fit because it's that same design and installation. They would be using the same equipment and also that they would be using in the line-fit process. So that's kind of the last step right before line-fit. And as I noted in my comments we've gotten there and a lot of the major fleets at both at both OEMs

Okay. And is the Boeing model for the 737 Max?

I'm sorry, no. Where we're doing service Bolton at Boeing right now is on the 787s. We hope to have the 737 Max assumed. Yes, that's a very important question.

Yes, is that the first one that you're targeting for later this year?

I'm not going to comment on that because Boeing would get mad at me and I don't want Boeing to get mad at me.

One other question, I know you said you could explain this for an hour. There is a lot of engineering involved, but how does the process for the Airbus A350 differ from the A330 and the A320, I know and I think April of 2016 you signed an agreement with Airbus to be part of their connectivity program, but the A350 was omitted for that and given Gogos global coverage. It seems that the A350 would be pretty strategic for you, so I was wondering how - like that aircraft model fits into the whole line-fit scheme?

Yes, so we're being installed by AIS that's Airbus Industrial Services I believe, is the initial stand for. Right now on A350 as it comes off the line and we're on a bunch of Delta A350s today. So that means we're not far from line-fit there. And frankly, having the equivalent put on right after it comes out of the factory, that doesn’t have that much time for the airlines. So they are willing generally to accept that as a solution. So, the A350s in there, where we had problems this past year with the A330s and A340s because of the electronic transmitter self locating transmitter. And there was a wind vortex issue, that held us up for about eight months and they couldn't install us post-production on those two fleets that's been taken care of, the assets approved, the solutions and ready to go back to installations on those aircraft now. So hopefully that answers your question.

Yes, sounds good.

Louie, thanks for the questions. I think that will conclude our Q&A session.

So let me thank you all for attending our Q4 earnings call and I'd like to leave you with a few thoughts. First, we have a strong cash flow generating business in BA. And not only does it have a unique competitive advantage by virtue of our spectrum ownership in our ATG network, it also has attractive growth opportunities in new market segments including the heavy global jet market and the light jet and turbo prop markets. Second, we're still investing in CA rest of world. But it's an extremely large and unpenetrated market and our global 2Ku platform is very well positioned to attractive long haul wide body market as Louie just mentioned. And we're building an important business across the world that we think will drive very good financial results for us in the long term. Third, CA-NA is taking a big hit from the deinstalls I mentioned earlier, but it's going to return to solid growth in 2020 as increasing take rates drive ARPA and strong free cash flow. Fourth, we're taking; we're dealing with our balance sheet and we started with the step we took in November to address the $200 million converts and now we're focused on dealing with $162 million stub. And then we'll return our attention to refinancing our senior notes hopefully at a lower interest rate than we pay today. And finally, by virtue of our industry leading market share, wehave the biggest scale in the industry, in scale economics or what it's going to take to win this business. So thank you for your time and I look forward to talking to you again next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.