Good day, ladies and gentlemen and welcome to the First Quarter 2019 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, today’s conference may be recorded. I would like to introduce your host for today’s conference, Mr. Will Davis, Vice President, Investor Relations. Sir, please go ahead.

Thank you, and good morning, everyone. Welcome to Gogo’s first quarter 2019 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 May 9, 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’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 measures in our first 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 management comments, we’ll 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 and welcome to our Q1 2019 earnings call. Was a year ago, then I hosted my first Gogo earnings call, took the job of CEO for the same reason I first invested in this company, a core belief in the value of delivering in-flight connectivity solutions and a belief that one could build a solid and profitable business delivering those solutions. Our business proposition is simple. We grow with usage of in-flight connectivity 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 grow. Today’s consumers want to connect from their home to the runway to 35,000 feet in the air. Usage is increasing across all of our business segment and we expect take rates to continue to grow as in-flight connectivity is no longer a nice to have, but is a must have. Passengers expect it, aircraft operators want it and the airlines and aircraft owners are committed to providing it. What’s even more exciting, Gogo has significant runway ahead of it as both of our markets are largely unpenetrated. Business Aviation is roughly 25% penetrated in North America and only 15% penetrated globally. And Commercial Aviation, they’re fairly well penetrated in North America is only about 35% penetrated on a global basis. So let me do a little retrospective. Last year there were a lot of questions about whether our vision for Gogo was achievable. I think our Q1 results, which represents our fourth strong quarter in a row demonstrate that we’re making great progress towards answering those questions. Past winter we flew 22,000 deicing flights in the United States without one incident of degraded system availability due to deicing fluid. We closed at $925 million. We recently closed $925 million…

Thanks Oak, and good morning everyone. Before reviewing our detailed operating results, I’d like to summarize our key financial accomplishments for the quarter. We have completely refinanced our balance sheet, strong operational execution is driving significantly improved natural results including underlying service revenue growth and cost structure reductions. And our focus on aggressively managing working capital is releasing cash to the balance sheet as planned. Our outlook for the year continues to strengthen, prompting us to raise adjusted EBITDA guidance and adding greater conviction to achieving at least a $100 million improvement in free cash flow over 2018. I’ll now review each of these achievements in greater detail, late last year we embarked on a two step process to refinance our balance sheet beginning with refinancing $200 million of our convertible notes. As Oak describe Gogo’s improving performance and great support from our debt investors enabled us to successfully complete the senior secured notes financing we recently announced. After initially closing on $905 million, we have the opportunity to place an additional $20 million priced above par with no consent fee bringing the total amount of the senior secured notes to $925 million. We’ve also launched the tender offer for the $162 million in convertible notes due in March, 2020. These financings achieve several key objectives for the Company. First, we extended the maturities on our debt. The previous earliest due date was March, 2020 excluding the 2020 convertible notes, which are the subject of the tender offer 80% of our debt is now due in 2024. The recently issued 6% convertible notes are due in May of 2022 with the conversion price of $6 per share. While we had the option to extend the maturity of the senior secured notes even further, we opted for a five-year term as…

Thank you. [Operator Instructions] Our first question comes from the line of Phil Cusick with JPMorgan. Your line is open. Please go ahead.

Hi, Phil.

Hi, guys, thanks. Minor distraction right at the right time. So let’s start with the cost savings that have been helping CA quite a bit. Can you detail more for us on what you’ve done in the last year and how you see the opportunity, not just this year, but going forward in cutting costs?

Yes, I mean, it’s a little hard to nail one thing, Phil, because the IBP plan had 102 initiatives. I would guess two-thirds of them had a cost savings element to them and they ran across all the functional operations as well as the G&A function. So it’s very broad base.

And what about going forward – I’m sorry.

To add to that, Phil, I think if you look at this year, as we described, a number of major projects had their primary investment that a large business is behind them, including things like the number of STCs we had to put in place for new airframes and the line-fit programs. We’re still investing in those but at a lower level. There were also some changes associated with the strategic direction. For example, as we shifted to more of a B2B as opposed to B2C consumer or a marketing approach, we were able to reduce some of the marketing expenses last year as an example. So going forward, we’ll see the benefit of those things as well as really tightening up operational, all the operational processes as Oak mentioned.

Everything as Barry just described, we’re all part of the IBP plan. The other thing I would say, Phil, is there’s still some benefit to come from that next year. The 102 or so projects actually run through are supposed to run through second quarter 2020. So we do expect some cost savings coming out of those.

Okay. And in the past you’ve talked about some of the Premier Airlines, it would be coming online in Rest of World during 2019. Can you talk about some of those airlines you bring online and then give us an update on the RFP phase out there? Thanks.

Well, let me, I’d say these big international airlines grow around wide body fleets. They install a little slower because wide body planes fly more. With domestic fleets it’s a little easier to ramp up quickly because the planes are down every night, then you can get at them. Whereas the wide body fleets, they often they’re flying 16 hours a day, so it’s harder to get them into majors to get the systems installed, and obviously, they’re also bigger. So the ramp is somewhat slower from the time you started installing fleets until you complete. But we’re making good progress. I think some of the fleets are getting further along or like the British Airways for instance is moving along at a pretty good pace right now. We have – we are seeing some good success at international. In Australia, we’re on Virgin Australia, both international and domestic and they’ve moved to free model and their take rates have really taken off. And it’s encouraging to see relatively new airline ramp up pretty quickly. So there’s a green shoot out there. What was the second part of your question?

Just talk about the RFPs that are out there.

Yes, there are, I mean, what we’ve seen in the last year or so is a much more deliberate decision making process of the part of the airlines. A lot of the international airlines really on would say, okay, who provides my entertainment system, I’ll just buy their IFC system. A lot of these sales were part of line-fit programs and they just sort of checked the box, yes, give me whoever you want Boeing or Airbus for IFC. Now they’ve been disappointed enough. I think they’re getting much more deliberate in that decision making process. So the processes are just taking longer. In terms of the pace, I think there’s a fair number of RFPs out there. There are not many in the United States, but there are a lot in the Rest of the World and I don’t think the pace has changed much from last year and we’re working on a lot and we’re hopeful that we’re going to win some good ones.

Good. Thanks guys.

Thanks Phil.

Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley. Your line is open. Please go ahead.

Great. Thanks a lot. Good morning. Interesting discussion, Oak, on the Ku opportunities. I was struck at the satellite show that a lot of the LEO constellations are highlighting Arrow as one of their top target markets. And I was just wanted to think about your conversations with them and how you think LEO might increase your options, your cost profile, et cetera. Is that something that’s part of your near term thought processing? Then we’ve got the airline switching back from airline directed to turnkey. Maybe you just give us a little bit of insight into what’s leading them to do that? And as we go to free, how do you see this evolving more broadly on pricing so forth? Thank you.

Yes. So, on LEO’s, first of all, we are ready for them if they come, in the Ku band at least our 2Ku antenna because it doesn’t have the mechanical gimbaled piece. It would have to flip back and forth at a very rapid pace to handle LEO’s coming quickly over the horizon. This is a flat panel design. We are ready for LEO’s, should they become economically viable, an important part of our constellation, if you will. We aren’t depending on LEO still because I think there’s a lot of legitimate questions about whether they get up, most of those revolve around funding. The LEO’s that would get up first if the current progress proceeds, don’t really have much dynamic capability, they tend to be blanketing the earth in a relatively even manner, which isn’t really conducive to extreme mobility. Our demand moves around the globe all day long. They had a pretty rapid pace. So we’re looking to increase capacity utilization viable being able to aim beams where we want them when we need them. So LEO’s, some of the later designs could handle that. The Telesat design does have more dynamic beams than say some of the earlier ones. So we’re not depending on LEO’s. I think that’s the answer to that piece. But we’re ready for them should they emerge. On the turnkey to AD issue, I think it’s almost kind of a red hair, right? I mean, we’re the only company that even has any turnkey deals because we’re old – because we’ve been around so long and back in the old days airlines didn’t want to pay to put connectivity in. So we had more of arrangement where we installed it, we can lease the space, if you will, in return for royalty and…

Okay. And any update on the next-gen ATG?

As I said in my comments, we’re working hard on that and we’ll have more to say later. We should note a couple of things. This will be our fourth ATG network as they say in the Farmers Insurance and we’ve learned a thing or two because we’ve seen a thing or two. We’ve been – we basically we’re at the point of deployment with our next-gen ATG system, the LTE 4G version that we’d developed with ZTE. We had 10 towers installed, we had 50 other towers on their way to be installed and we’re flying very successful test flights. But I think we’d be foolish not to understand the risks in having a Chinese telco as a partner now, sadly, and we’d need to adapt to that. So we have been working, and frankly, we’ve been working on the next-gen version of something since 2011. And we have lots of different ideas for how to do it and we have lots of very smart engineers who have been thinking about it for a very long time. So that time since the first GTE issues crept up last break, we’ve been hard at where they’re looking at alternatives and, we’ll have more to say about our – our direct path utilizing those alternatives, hopefully in the not too distant future.

Great. Thank you.

Thanks, Simon.

And our next question comes from the line of Ric Prentiss with Raymond James. Your line is open. Please go ahead.

Yes, thanks. Couple of questions, Barry you mentioned, you’ve been working aggressively on the working capital side, free up some cash also. How much cash do you think you need to traditionally run the balance sheet, month-in month-out, quarter-in quarter-out?

Yes. The first part of that, Rick. Yes, we are working aggressively on that and it’s driving the underlying process improvements, which is releasing cash through inventory and receivables management primarily. What I would say about the liquidity, is that when you look at the projections that we have and including the tack-on that we’ve done and $30 million in a revolving ADL facility that came with this transaction, but we expected our liquidity position is going to be remain above the $100 million when you include those things. So our projections are to have a good cushion above the $100 million range. In the terms of the amount of cash required to run the business. It’s certainly below that level meaningfully, but, we’re comfortable with that liquidity position given our current plans and the cash flow trajectory that we’re seeing right forward.

Okay. And Barry you mentioned, I hope you had in the past, the flexibility in the most recent senior note includes the $150 million in case there’s a strategic investment in the next 12 months. Help us understand, one, why is that inserted in there? Is there something actively being worked on in that kind of timeframe? And two, what should we think that that type universe would be? Is it a customer or is it a peer is just strategic, is it a financial, how should we think about what to make up the $150 million that you called out on the call?

Sure. I mean this is a kind of an extension of the conversations that we had last call, as you know at that time, we had some inbounds about selling and if one of the divisions or another for example, those relationships that we’ve developed through that process had been ongoing. I would say that the nature of the conversations has evolved from an outright sale of the division to something that looks more like a strategic investment in the company. That would likely come along in conjunction with some kind of a commercial arrangement. So it’s more of a strategic investment that would augment the business and would enable us to advance the business commercially as well as bringing in some capital to the company. So that that amount – is that amount that would be meaningful, obviously to bring in a partner like that. And we wanted to have the flexibility where that to come in as a cash infusion to either pay down debt or add cash to the balance sheet. So being able to call it at one of three gave us that flexibility and, and our debt were very supportive of that idea as well.

If the timeline extends out beyond the 12 months, does it just mean that you put on to cash or you don’t have to worry about the – no call to side or I’m just trying to say, why the 12 months?

Yes, I think 12 months is for a couple of reasons. One is that – those conversations remain ongoing and we will see if we get something done, it’s going to happen to probably happen in that period of time. And secondly is with the shorter no-call period of two years. When you get beyond that, then the note the benefit of the 103 does come down as you get closer to the no-call, which is I think as you get closer to the first call period, which as you know, is that par plus half a coupon. So 104.5 so. So that was kind of the rationale for including that period of time.

Make sense. The last one for me. Piggy back on Simon’s question about the next-gen ATG. I know you’ve got more to say later, you’re happy with your progress. If you help us break just within the zip codes, and what might be, are you talking about as far as CapEx or OpEx or our physical requirements, as you look to roll that new solution out?

I think we’re looking at, maybe a little bit more than we had in the fifth for a prior solution, but not dramatically different. And we’ll give, you can give more guidance on that down the road.

That’s good. Yes. Some people are just nervous, what are you talking about? Is it a big change outside of that helps. Let me say it a little more than the previous one. Thanks.

Thanks, Ric.

Thank you. And our next question comes from the line of Louie DiPalma with William Blair. Your line is open. Please go ahead.

Good morning.

Hey, Louie.

Guys, with the debt refinancing, the de-icing and the de-install now nearly complete, there’ve been many references to free cash flow generation and being fully funded in the press release and in the scripted remarks. Do you anticipate being free cash flow breakeven next year? So for 2020 and for actual positive free cash flow generation the year after on a fully levered basis?

Yes, Louie. We haven’t given specific guidance around that. But what I would say, is that our outlet for free cash flow continues to improve. I think to your question around 2021, we do expect to be solve the free cash flow positive in 2021, and in 2020 approaching. So when you look at the cash flow profile with the liquidity that we have now, with the improving EBITDA, with the benefits of the cash management programs we’re putting in place, all of those are contributing to that. So, so approaching it in 2020, I wouldn’t say we’d get all the way there, but then meaningful positive free cash flow generation in 2021.

Sounds good Barry. And for the full year of 2018, the international part of the commercial division improved segment EBITDA by roughly $12 million, and it continued to show solid progress in the first quarter. And Oak, you noted that Virgin Australia is shifting passenger free, which also seems to be a positive development. How should investors think of modeling the international segment and as more aircraft come online and as they become more seasoned, is like $12 million per year and improvement a good number or do you think it could increase beyond that for the next several years? I was just wondering how you guys are, are thinking about the improvements in that division?

Sure. Let me first talk about the drivers of the improvement and then I can maybe frame the, kind of the expectations. There are really three primary drivers to improving the rest of the world profitability. The first is, increasing number of planes. So as we installed that backlog, that will certainly drive that in, and you’re seeing that benefit now as we get better utilization of the network because you have to obviously have coverage around the world and as we imply more aircraft, we can get better utilization of that coverage and then add capacity as it’s required. That turns into more of a variable cost, as required over different parts of the world. So the first is the plane, the second is the average revenue per aircraft. And as I’ve described, we’re seeing some, some real improvements there as we get these aircraft installed and expect that to continue as we outlined with the addition of these high quality fleets. And then the third one is, is the cost structure. So there are some meaningful investments in getting started in rest of world. And then in addition, we do see the opportunity to drive Satcom cost down even further. So the benefits to us is airborne bandwidth cost as well as the utilization and no for the reasons that Oak outlined in the, we see the significant technology advancements in satellite technology that we do see that. I’m really helping probably beyond what we had expected when we were doing these plants last summer. In terms of the, giving you some context for the, the overall improvement in the – the burn for ROW. Yes, what we said a while back and we expected 2017 to be the peak year, the investment in ROW and that has been the case. You see it coming to $95 million from over a $100 million from 2017 to 2018. And we would expect to see that an improvement of that order of magnitude this year. And then beyond that, it’ll really depend on kind of the ramp in the ARPA four of those aircraft coming online because most of the least the current backlog will be installed as you get out into those out here. But we’re growing more optimistic I would say on the revenue opportunities there then we were going back last summer for sure. I mean just to quantify that, we had said going back to last summer that we were projecting it for purposes of planning a take rate. There wasn’t, it was 12.6% in 2022. We’re beyond that already. So our expectation for EBITDA generation, free cash flow generation has certainly improved.

Thanks a lot guys.

That was our last question. Thank you.

All right. Well, thank you everybody for attending our Q1 2019 Earnings Call. And I’d like to leave you with a few thoughts. First, we have a really very strong cash flow generating business in BA. Which has not only a unique competitive advantage by virtue of our own spectrum, but also has ample run rate for growth, because BA is relatively unpenetrated. Second rest of world is growing, but it’s an extremely large and unpenetrated market. And with our global 2Ku platform, strong backlog, we think we’re well positioned to win share, when our share of the attractive long-haul, wide-body market. Third, CA-NA will return to solid growth in 2020, as increasing take rates drive ARPA and strong free cash flow. Fourth, we strengthened our balance sheet as we’ve noted. And finally, by virtue of our industry-leading market share in scale, we really believe we’re positioned to take advantage of the opportunities in front of us. We look forward to demonstrating that and talking to you about it, in the quarters to come. Thank you very much.

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