Good morning, ladies and gentlemen, and welcome to the Second Quarter 2019 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Will Davis, Vice President of Investor Relations. Mr. Davis, please proceed.

Thank you, and good morning, everyone. Welcome to Gogo's second 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 August 8, 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 include a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our second quarter earnings press release. This call is being broadcast on the Internet and available on the Investor Relations section of Gogo's Web site at ir.gogoair.com. The earnings press release is also available on the Web site. 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. We're pleased to announce a very strong quarter, exceeding our own revenue, adjusted EBITDA, and cash flow expectations. Quarterly service revenue grew in all three business segments, and reached $174 million, up 9% over Q2 2018. Adjusted EBITDA exceeded our expectations and grew to $37.8 million, up 100% over the prior year period, driven mostly by service revenue and IBP-related cost savings. There were also a couple of "Good guys" that helped adjusted EBITDA in the quarter, and I'll describe those in just a minute. Free cash flow also exceeded expectations at negative $3 million in the quarter versus negative $35 million in the year-ago quarter, and negative $37 million for the first-half 2019 versus negative $144 million in the first-half a year ago. I'm very proud of my Gogo teammates for delivering such a great quarter. We've worked hard together over the past year to improve our operations and to achieve our financial goals, and we're on track with both. So thank you very much. I'm going to quickly touch on strategic developments, and then dive into the quarter. I'll leave the heavy number lifting to Barry. As I look ahead, I feel very good about where we are strategically. As I've said before, our model is to grow as demand for in-flight connectivity. And I think that demand is poised for accelerating growth as airlines increasingly look at providing free IFC to passengers, and as the aviation ecosystem looks for cheaper and faster ways to access operational data. A key enabler of about ability to scale and meet this demand on our satellite network is our open architecture asset-light operating model. And key enablers of our ability to scale in the ATG world are our proprietary spectrum and our ATG infrastructure which can provide redundancy and…

Thanks, Okay. Before reviewing our detailed operating results, I'd like to highlight our financial accomplishments for the quarter. Adjusted EBITDA of $37.8 million approximately matched last quarter's $38 million, the best in the company's history and was well ahead of our expectations. Each of our three business segments posted gains in service revenue for the quarter, and this revenue performance was complimented on the cost side of the business to operational execution and Satcom efficiencies. We're again raising adjusted EBITDA guidance on this call. The mid-point of our new guidance implies 55% growth in adjusted EBITDA for the year. Gogo's cashflow and therefore our cash position is also running well ahead of plan. For the first six months of 2019, un-levered free cash flow improved by $144 million versus the same period last year and was positive for the third consecutive quarter. We're projecting un-levered free cash flow to be positive for the full-year 2019 and we are on target to improve free cash flow by at least $100 million over 2018. This is a particularly important achievement considering that our net cash interest expense for the year will be $40 million higher in 2019 versus 2018 primarily due to making three interest payments on our senior secured debt during the year due to the timing of our refinancing. This improved cash flow performance is the result of the very strong adjusted EBITDA performance achieved during the first-half of the year and improvements in net working capital. While our cash position is ahead of plan, we want to ensure that we have ample buffer capital to support the business. As we previously disclosed, the indenture for our 2024 senior secured notes gives us the flexibility to enter into a $30 million revolving line of credit with an additional $30 million…

Thank you. [Operator Instructions] Our first question comes from the line of Ric Prentiss with Raymond James. Your line is now open.

Thanks. Good morning, guys.

Good morning. How are you doing?

Good. Thanks. Obviously encouraging new on the take rates, both CA-NA and CA-ROW, where do you think that heads? Obviously previously you had what we thought was pretty conservative expectations on take rates, but I know you also mentioned two airlines on free, Delta did their trial, but what are your thoughts on how we should view the demand side of this equation kind of on the take rate side?

Yes, I mean obviously the move to free will drive take rates up dramatically. Our take rate today has blends of both paid browsing sessions, streaming sessions, and free messaging in it. If the things go free, free messaging kind of goes away, and we expect a very large jump in the browse sessions, and potentially jump in streaming sessions. So it's an order of magnitude larger, Ric. We see 30% take rates on free fleets in Asia right now. And they could be higher in North America where there are longer routes.

Yes, and I think -- yes, go ahead.

I was just going to kind of do a double-click on that, Ric. If you look at take rates under the steady state model with 2Ku being installed it's a little bit different in North America versus ROW, as we described a bit. In North America, as 2Ku gets more fully installed we do expect to see those take rates improving over time as that capacity grows and it's not constrained. In ROW, there is this kind of combination effect of seasoned airlines and new airlines. And as I mentioned, there's quite a disparity, almost 2X between the current take rates for the new airlines versus the seasoned airlines. But we do expect those take rates for the new airlines to grow pretty significantly as they get seasoned to approximate what we're seeing for the take rates overall in that part of the world.

That makes sense. And then on the cost side, we were obviously pleasantly surprised by the sat-com costs. You've called it out a couple of times on the call, but how should we think about modeling that. It's probably one of the hardest ones I've found to model for you guys, and as we think about the take rates going up how you manage that cost side. So how should we think about the sat-com cost going forward besides just what you mentioned for the second-half of '19?

Yes, so I think there's -- first, it's important to kind of underscore what's going on structurally here. We are seeing the benefits of the technologies in the network management that we're putting in place that does drive less sat-com requirement than we had previously expected, so that's a good thing. We see that continuing. In terms of how to model going forward, clearly sat-com expense will grow as usage grows. There are a couple of drivers of that. One is that we do see absolute levels of pricing per megahertz coming down around the world. That has been true historically, and we expect that to be the case, and as we also see ourselves getting better utilization in sat-com, particularly in rest of world. As you know, we have it as both a coverage requirement and then a capacity requirement for sat-com, so we do have worldwide coverage. And as we put more planes flying in that network we will see, as we have already, a significant benefit in improved sat-com utilization. But as those planes get added then you'll add capacity as it comes along. So I think the way to think about that is that we see data margins generally north of 50% in North America, the costs in rest of the world continue to be higher, but we'll see efficiencies over time from that, but those data margins will only grow as we see that better efficiency and the reducing cost, but not to that level in the short-term that North America is seeing.

Okay. And glad to hear you're making progress on the 5G next-gen ATG by picking a U.S. provider. You mentioned a couple of times that there'd be some higher costs. How should we think about the cost of that 5G impacting '19 and '20, both on OpEx and CapEx?

Yes, on the spend starts, it started now a bit. It's in the order of a few million dollars for the back-end of this year. If the spend ramps during the course of next year it is comprehended in the guidance that we have given. In terms of the CapEx side, it's comparable to on an aggregate basis to what we have laid out before for the LTE based network.

Okay. Thanks, guys.

Thank you. Our next question comes from the line of Phil Cusick with JPMorgan. Your line is now open.

Yes, a couple of follow-ups there from Ric's questions. First, you said Gogo 5G, you have a solutions provider. Is that the vendor you'll use, and how many sites you envision at kickoff?

Yes, the -- in our business we -- it's a fairly specialized business, so when we develop a new network we can't buy things off the shelf, we have to actually design the equipment with our vendor. So we are partnered with an American, United States-based 5G, I would call them, an infrastructure company, in designing and developing the radios and antennas, et cetera, for the new system. So like we've been partnered with ZT [ph] in the past, we now have an American vendor in that role. In terms of towers, I'm trying to remember if we've got 200, Barry?

Yes, 150 to 200 at rollout.

Yes, 150 to 200, yes, when we rollout.

And then grow as required from there.

Yes. And a lot of those towers will probably be same as we use today for ATG network, so we'll get some synergies there because we've already got sheds, and generators, and things like that. Obviously we will be paying more rent at those towers because we'll be taking more space. But there are some cost synergies in the network rollout.

Good. Can you give us any sort of results from the Delta Unlimited trials, how did speeds hold up, what did you see in terms of capacity issues?

Well, the trial was really aimed at market acceptance of free, it wasn't meant to test our system. Going to full free we obviously have things we need to grow, like our satellite capacity and other things to be able to really provision that. So in terms of how the tests went from a market perspective I think that's a question Delta should answer. It's their role to announce what they're doing with the free Wi-Fi, and it's our job to support them operationally. So, I'll leave it at that.

Okay. And then lastly, any update, Oak, on how you think about the strategic and competitive ecosystem for in-flight broadband globally? What are you seeing in terms of both demand, and then what are you seeing come from your competitors? Thanks.

In terms of demand, we see the trend of free Wi-Fi will drive a tremendous amount of demand. And I think that will actually be good for our industry. Our industry has been kind of the dog everybody likes to kick for a couple of years, but with demand growing I think you will have a lot of growth industry wide. There's been always a lot of speculation about some consolidation in our industry. I think that that speculation continues. Most recently, you have Inmarsat going private, which I think, in partnering with Panasonic; I think that's an indicator of a type of consolidation. And I think we expect that there will be more consolidation or there may be, so we want to be in a very strong position to play a role in that if it happens.

Just to clarify, anything happing on the RFP side, we've seen kind of a freeze on new airlines for quite a while.

Yes, there are lots of RFPs, there aren't many awards. Yes, so we are seeing a lot RFP and we're deep into some processes that we've literally been working on since I got here or before I got here. So we hope to be able to conclude those, but nothing to report at this time.

Okay. Thanks very much.

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

Thank you. This is Ryan Park [ph] on for Simon. Just wanted to touch back on the Delta free trials, are you able to comment on any sense of a timeline there for an ultimate decision or any future trials that have already been set? And then secondarily, can you comment on any ongoing strategic discussions around potential investments or transactions on that front?

We're -- I'll start with the second question. Right now, we're really focused on operationally supporting airlines that want to go free, and we're going to be focused on that, I think, for a while, so not very focused on strategic transactions at this particular moment. In terms of timeline for Delta, you really have to talk to Delta about that. I think, you got to understand what your role is in world and our role is not to be commenting what Delta is doing with IFC.

All right. Thank you very much.

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

Good morning. Oh, Barry, and Will.

How are you Louie?

Not bad. What are the engineering challenges for Gogo's 2Ku system to offer free Wi-Fi at such a large scale that has never been done before with 98% availability and are there necessary hardware modifications? Or is the formula as simple as increasing capacity via purchasing more bandwidth from your partners, SCS and Intelsat?

Well, we've actually got 12 partners, but yes, that's it, Louis. I mean, the good news about to 2Ku is that we saw that as future proof, and it really is future proof. So the ramp up on the aircraft for a 2Ku aircraft is very minimal. On the satellite capacity in satellite capacity yes, we have to ramp up satellite capacity, that's for sure. The other good thing about the 2Ku antenna, we talked about being future proof. And, we think that it is very conducive to future technologies, like Leo's et cetera. So, as those kinds of technologies come online we will be well-positioned to serve our airlines with lower latency, lower costs, et cetera.

So you don't see any, like technology impediments, or it's just a question of like you spending more money, it's just a money question. And if the money is better than you can offer the free Wi-Fi at scale.

Yes, that's basically right. We are making some software improvements. In terms of portals and things like that, that all has to change when you go to free. I mean, you don't need to get a guy's -- person's credit card number anymore, things like that. So there's some software development involved, but that's relatively minimal.

Okay, and on the business jet side. You've talked a lot about the ADSP creating a constraint. Would you expect ATG antenna shipments to be up next year relative to this depressed 2019 number? Or is it too early to say right now?

Well, I think we expect there to be some crowding of the aftermarket channel through second quarter. We've looked at the numbers of jets, they're still not installed with a ADSP. We expect some of those will never be installed, they'll just be retired. But we do expect a set of those to still come in next year to get installed and that we think in talking to the dealers and MROs and they expect to still be installing a fair amount of ADSP equipment through Q1 and Q2. So, I think that will still impact our equipment sales going into the year, but we expect it will pick up again in the second-half.

Yes, and then in total for the year, Louie, we do expect the equipment revenue to kind of be the crop this year relative to 2018 and then pick it back up again in 2020.

Got you. And a more broader question on Gogo shares traded down sharply by over 30% from like $6 over the past two months going into this earnings report, you guys probably noticed, we think there was concern that your record first quarter EBITDA performance was a fluke. And with your leverage, it would magnify weak second quarter results, instead you doubled the EBITDA consensus expectations. But can you talk about like after the strong first-half of the year, how your improved visibility like may or may not allow you to invest into what I would refer to as discretionary projects such as like the 5G and like flat panel phase there is with Fazor [Ph] and like it's been speculated you're working on like a tail mounted business shed antenna with a lot and like do you feel comfortable in your liquidity to do these discretionary projects now, despite the fact that the stock market seems to be doubting you?

Yes, the stock market hates us, we know that but our projections include our strategic investments like 5G phased array antennas. Yes, we made an investment in Fazor that, we believe in the ESA at some point, we're not talking about the timing of those. We have not officially announced a tail mount antenna for the BA market. But we have a vendor who seems to have announce that prematurely, we hope that means that they will deliver the product prematurely. The -- So yes, those are all contemplated in our current cash flow guidance. And I'll turn it over to Barry to get a little more detail in the numbers.

Yes, so we're, keeping the pedal to metal on 5G. And those other initiatives, as I said, are continuing to make those investments, we think it's important to maintaining this market position and ultimate financial performance. So we are still pressing forward on those, we're very pleased to see the first-half. Obviously, come in with the level of EBITDA than it is, but we're also just being cautious as we provide guidance for next year, there are some known things we talked about. So these good guys in the first-half of the year on the revenue side that translates into the EBITDA benefit. Those will not persist. We are planning on ramping some of these expenses, like we talked about in Satcom and in OpEx to cover these strategic investments. But having said that, we think, the guidance that we have of $105 million to $150 million is solid EBITDA performance a 55% growth again at the midpoint and we see that momentum continuing into 2020. I think that's the important point here and we realized that we've had to dig ourselves out of a hole in the last 15 months or so on the heels of the icing crisis. And as we talked about on the last call, we could knock those off one-by-one. And we're in a much, much different place now. And we think have the foundation laid, and it's showing up in the financial form of performance that gives us confidence about really being able to deliver on the kinds of increases in EBITDA that we've talked about.

Sounds good. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Greg Davis with Nottingham [Ph] Securities. Your line is now open.

Good morning, guys. Thanks for taking my questions and congratulations on the quarter. First, in the past, you've talked about using beam forming technologies to more efficiently utilized capacity, really allowing you to reduce kind of like leasing cost quite a bit. Could you provide some additional color on the timing of when we might see those occur, given expenses, their Satcom expenses are expected to grow in the near-term?

Yes, well, obviously, there's a couple of types of beam forming technologies. We are more and more moving to high throughput satellites, which are Ku satellites with spot beams as opposed to wide beams, and that is helping our efficiency. Now, we've also talked about software defined beams and more dynamically programmable satellites. Those are out there; I would say in 2023 and beyond. That's technology that will did is pretty well designed, but it needs to actually be manufactured and launched and there are some technological hurdles that need to be overcome in terms of modem technology and other things for that to become meaningful. And then the third type of beam forming technology we talked about is in our 5G product. And on the -- in the ATG world, where that will use beam forming technology to the antennas will point more directly at an aircraft as opposed to broadcasting a large funnel like our current ATG product does and that will roll out in 2021.

And I think, Greg, to your question on the increase in Satcom expense. Yes, we, of course are projecting increases in Satcom expense, but that's driven by a significant increase in usage as we add more planes and take rates increase that we've described. The level of growth in that expense is muted by the kinds of things we're talking about, high throughput satellites, raw bandwidth costs coming down, a better utilization through the kinds of network management capabilities we have.

Right, okay. That's helpful. And then second, as we think about ARPA in the rest of world segment and you talked about how the percentage of aircraft online that are in new fleets is expected to grow from maybe now till year-end? You talked about new fleets being a little bit more reluctant to market their ISC until the entire fleet is installed. Does that kind of mean we should expect ARPU in the rest of world to slide lower till yearend?

Yes, you have certainly the concept right which is that you have this kind of blended ARPU that is result of the difference that's more than 2X between the seasoned aircraft and the new aircraft. If you look at that over time, over the last couple of years that gross ARPU has seen that impact. What's happening more recently is that if you look at this year versus last year for example, we are seeing improvement in blended ARPU overall, but we see that kind of staying relatively flattish as you go forward. We see it coming up in the back half of this year. But it wouldn't count on big improvements in that blended rate of ARPU until we get these newer planes installed.

Fleets.

Excuse me, newer fleets and seasoned for the new airlines. But then, you really see the benefit of that.

Got it. That makes sense. And last quick one from me. Why do we see take rates decline sequentially in CA-NA and on the rest of the world side?

That's seasonal and relatively typical.

Okay, fair enough. Thank you.

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

Hi. Thanks guys. Nice quarter. Just to pick up where we left off the last question on the ARPU being flat sequentially, as the new planes are coming online and is offsetting the growth in the planes that are already seasoned-in, what would you say though is the underlying ARPU trend here if we think about on a like-for-like basis for those seasoned planes? I mean is it up low single digits, mid single digits, high single digits?

For the seasoned plane?

Yes.

Yes. So I mean it's up in the second quarter. As I mentioned was 16.1%. In the year ago quarter, it was 14.5%. So that's seen then. And so we see that -- seen that trend grow, so.

I am sorry. In the rest of world segment, those were the numbers there?

Correct. Wasn't that you were asking about I think?

Yes, yes. No, that's great.

Were you asking about take rates?

No, no, that's right. Thank you. But speaking of take rates, given the trend toward airline directed and free, I am not sure take rates are enough to really measure the progress. And I am wondering how you think about that. Seems like we should be thinking also about I don't duration or -- duration of usage or megs per flight or something like that. Do you have any thoughts there? What are the metrics are you looking at to gauge usage and what can you share with us?

Yes, I agree with you. The take rates compared to today are going to be kind of meaningless. They are going to be a lot higher. And the way we look at this in very simple terms is volume is going to we think explode with free. Unit cost will come down. Pricing rather will come down obviously. But, will be more than offset by the growth in volume and produce solid revenue for growth for us and value for us.

Okay. So on the satcom cost side and I apologize if I missed this too, but I heard, Barry, obviously that unit costs are falling. But could we -- what would you say is going on with the rate of that decline? I mean are cost declines accelerating or decelerating today? And given your outlook for increased global capacity what do you expect over the next few years?

Yes. I mean we are doing deals right now at continually declining cost on the Satcom side. And we see them on the forward as we look -- so the forward market if you will falling pretty dramatically over the next couple of years. There is a lot of supply coming on in the 23-24 timeframe which we think will further depress pricing. So, I think the long-term trend in Satcom is going to be continually decline in pricing. And at our side will be focused much more on continuing to make efficient use of megahertz appropriately and brining our capacity utilization up. So, all those trends will be on unit basis driving Satcom cost down.

Thanks very much guys.

Thanks Lance. Okay, that's it.

All right. Well, thank you very much for attending our Q2 2019 earnings call. And I would like to leave you with a couple of thoughts before we go. First, we have a very strong cash flow generating business in BA. Not only does it have unique competitive advantage by virtue of our spectrum ownership, but it also has ample runway for growth because the BA market is relatively un-penetrated. Second, rest of world is growing. It's also an extremely large un-penetrated market. And with our global 2Ku platform, our progress on line fit and our strong backlog, we are well-positioned to win our share of that attractive market. Third, CA North America will bottom out in the second-half of this year as the impact of American Airlines de-installs and their conversion to the airline directed model will finally be behind us. Fourth, we strengthened our balance sheet and given ourselves strategic flexibility by financing our $162 million convertible sub and our $690 million senior notes and pushing those maturities till 2024. And finally by virtue of our industry leading market share and our asset light operating model, we are well positioned to take advantage of opportunities that I just described. We look forward to demonstrating this you in future quarters, and thank you for your time this morning for joining us for our quarterly phoning. Thanks again.

Thanks very much.

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