Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference call may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Will Davis, Vice President of Investor Relations. Sir, please proceed.

Thank you, and good morning, everyone. Welcome to Gogo's third 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 November 7, 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 third 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 management's 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 and welcome to our Q3 2019 earnings call. We're pleased to announce a very strong quarter, with adjusted EBITDA and free cash flow well above our expectations. Though, as we predicted on our last call, service revenue is down as a result of the final American Airlines de-installs and conversion from turnkey to the airline-directed model. Though, we're not happy about that decline in revenue, it's worth noting that underlying growth has made up for a lot of that loss. We achieved $158 million of service revenue in Q3 this year, which is right about where service revenues stood the quarter the de-install program began in earnest, in early 2018. I'm also pleased that despite having an extra interest payment in the year, we remain on target to improve free cash flow by $100 million over the prior year. I'll leave the rest of the numbers to Barry, and now move on to some of the operational aspects of the business, and then I'll turn to strategy. It goes without saying that these are very exciting times at Gogo. As we scale our operations in support of Delta Airlines' desire to provide free Internet service to its passengers, as we made great progress on our Gogo 5G product initiative, and as we work with our satellite partners on new and exciting ways to serve the aero ISD market. It's also exciting to see a nice bounce back from our Business Aviation division as OEMs made some nice catch-up orders in the quarter, and some of the ADS-B congestion cleared up in the aftermarket. And perhaps most exciting, today, we expect to sign a contract with a very prestigious EMEA airline to install Gogo 2Ku and live TV on a significant portion of their wide-body fleet. A…

Thanks, Oak. Let's jump right in. Beginning with a summary of our third quarter results, Gogo delivered another great quarter financial performance with adjusted EBITDA and cash flow both substantially exceeding our expectations. This was the third quarter in a row that adjusted EBITDA exceeded $35 million. This quarter's outperformance was driven by a rebound and business aviation, and commercial aviation expenses remaining below budget. On a sequential basis, the CA equipment revenue was at 58% and segment profit was at $6 million. CA's up expenses have continued to run below plan for both Satcom and overall operating expenses. From January to September, we have delivered $111 million and adjusted EBITDA, exceeding 28 teams full year performance of $71 million by over 50%. We are raising our adjusted EBITDA guidance, as we have done in each of the last five quarters, this time to $120 million to $130 million dollars for the full year of 2019. At the midpoint, this represents a 76% year-over-year increase and adjusted EBITDA. In addition to the strong adjusted EBITDA performance, we have dramatically reduced our [indiscernible]. During the quarter we achieved record positive free cash flow of approximately $34 million. During the first three quarters at 28 teams, we burned $216 million in cash versus just $3 million for the comparable period this year. For the second quarter in a row on levered free cash flow was about $30 million at a positive $33 million. We continue to project positive unlevered free cash flow for the full year 2019. This improved cash flow performance is the result of the very strong adjusted EBITDA achieved during the first three quarters of the year, lower airborne equipment investments and improvements in net working capital. We are achieving the aggressive targets we set for reduce inventory purchases…

[Operator Instructions] Our first question comes from Philip Cusick of JP Morgan. Your line is open.

Hey, guys. Two, I guess, first, congratulations on the deal to be signed today, can you give us, Oak, an idea of the scale of that contract and what type of usage the customer envisions? Maybe what kind of competition did you see on that? And then Barry, you were just going through some of the issues in jumping off from 2019 EBITDA and free cash flow into 2020. Not to ask you for guidance yet for 2020, but maybe if you can give us some of the net impacts on both of those numbers that would be helpful? Thank you.

Yes, Phil. Oakleigh first, yes, I don't want to get in front of the airways' announcement so I don't want to go too far, but I'll say that it's a global road structure wide-body jets. We are -- the competition were other ISD players that can offer global coverage, the usually suspects there. I think they are impressed with the quality of 2Ku, they flew it a lot on other airlines, and I would say as an airline it's extremely focused on quality and service. So it's very rewarding to win that deal. It's a -- both 2Ku as well as our IPTV product.

That's great.

And, Phil, on your question about 2020, thanks for not pressing us for giving guidance on this call. As you know, we do that on our fourth quarter call, and we're still in the midst of budgeting for next year. But here are some things to think about. So this year, there is that $9 million one-time benefit adjusted EBITDA in 2019. As we look at next year, the IBP savings are coming in ahead of plan. As we said coming into the year, we expected about half of those will more to be realized, half of the $75 million this year. And now it is more like two-third of the $50 million, so that certainly helps. I would say on the IBP, really most of the operational disciplines and process improvements are happening as planned. There's one project running behind plan, it'll extend throughout 2020 having to do with driving efficiency and production operations. And we will look to be increasing some expenses for some of the important investment areas, 5G being the major one and BA. And then that's on the order on the OpEx side of kind of $10 million to $15 million. And we'll also be doing things like adding to our really talented satellite team to meet the significant demand. And then maybe some programs also that we would implement to take advantage of some new opportunities, things like line-fit and so on. So, hopefully that gives you a little more color on how to view 2020 unfolding.

Thank you. Our next question…

Okay.

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

Hi, guys. Thanks for taking the questions and nice job on the quarter. On the business aviation segment, you obviously talked a lot about kind of rolling past the FAA ADS-B installation mandates. Those were a big deal in second quarter. I'm guessing that you didn't really see any impact of that in the third quarter, given the near record volume of shipments. But was that true or was there perhaps even some lingering impact in the beginning of the quarter maybe? And I guess I'm just trying to think about what, if anything, that suggests over the next few quarters.

Yes, no, there's still impact. In talking to the dealers, they have -- the big dealers in particular have handled all the larger aircraft at this point. There are more, I'd say, lower value hauls that are still getting ADS-B. They've moved a lot of that out to what they call satellite facilities, so more remote airports where they have hangers, et cetera. And they've been able to open up shop floor space in their major facilities and get back to selling ISD and other products which are frankly more profitable than ADS-B is. So that said, there's still some pressure there, and I think we expect to see ADS-B installs continue through the first-half of next year. I think the dealers expect that. So, I don't think we're fully out of the woods on it, but it was nice to see it pick up in those orders. Remember, those aren't all activations, those are units that are shipped. In the BA business we sell on then we book revenue when we ship to the OEM or the dealer. They then actually install those, so some of those will go in the shelf and be installed over time.

And just to add to -- or explain about the mix on OEM versus aftermarket, I mean the OEM has particularly picked up, and so you see the impact of ADS-B on the aftermarket side, so that's what we're -- we'll still continue to see that during the course of the year.

Great. And then if I could just ask a follow-up, again in the BA segment, but the monthly revenue for aircraft online on the ATG side, for the last several quarters it's been sort of stuck in the low single-digit range. Is that just sort of what we should expect going forward, or do you see an opportunity for reacceleration either under the current AVANCE L5 program or perhaps when you've eventually rolled out the 5G systems?

So, are you asking about ARPU in the ATG part?

Yes.

Yes, well, there's a little bit of downward pressure there because the people had unlimited -- a lot of people were buying unlimited plans, when [indiscernible] first rolled out, and of course when they go over certain thresholds they would be getting charged more, et cetera, et cetera. And so they've gone to more managed plans, I guess. And so that's been a little bit downward pressure slowing it down, but you still see a lot of people upgrading plans as well. We don't have 5G -- I wouldn't want to get it out and speculate too much about what our 5G pricing for plans will be. We have not decided that yet.

Okay, thanks, guys.

Thanks. Lance.

Thank you. Our next question comes from Scott Searle of ROTH Capital. Your line is open.

Hey, good morning. Thanks for taking my questions. Nice job on the quarter, guys. Just a real quick question on Satcom capacity, I know you guys have been working hard to go back, renegotiate, expand the footprint to give you guys some diversity and reliability and backup in terms of satellite failures. But can you help us understand how some of those contract renegotiations get feathered into your Satcom costs, particularly on the international front where utilization is a lot lower just given the number of aircraft that are currently live. And if you could extrapolate that now with the new EMEA customer and 500 aircraft in backlog, does that get you to breakeven results in international once they're fully deployed? Thanks.

Well, let's start with the renewals. I mean most of the -- when we're renewing now we're using -- first of all, we're not using renewing on the same satellite, we're committing to a new satellite, like we did with Eutelsat 10B, which was announced, I think, last week. And those new satellites are at much lower unit cost than the contracts that are rolling off, so dramatically lower. So those are improving our economics in rest-of-world, and that's going to be one of the major drivers towards profitability in that division. I'm sorry, the second part of your question on capacity was?

Well, Oak, just kind of extrapolating your backlog out in the rest-of-world with 500 aircraft, plus the new deal that's announced today. As you start to get some better utilization with that footprint and better costs does that get you to breakeven just deploying against what you've got visibility and under contract to now in international markets? Thanks.

Yes, Scott, I mean as we've said, and as Oak kind of reiterated on this call, the drivers remain what they've been, of getting those installed, increase the ARPU of new fleets, expenses as we do see some of the OEM costs coming down over time as we get those programs behind us and so on. Clearly the increased demand being driven for satellite capacity helps worldwide, so just got to underscore Oak's point on that. And I would also say that this order that we're announcing today certainly helps, and you also saw the announcement that we made about Eutelsat for capacity over that region, so that also helps as current contracts come up and we're able to deploy that 10B satellite at attractive pricing. So, I wouldn't want to say specifically about what that looks like for [indiscernible] clearly, this helps, and it's as part of the strategy that add our lines in those regions where we have excess capacity and can drive it down, and continue to drive the cost structure lower.

Great, thank you. Nice quarter.

Thanks, Scott.

Thank you. Our next question comes from Ric Prentiss of Raymond James. Your line is open.

Thanks. Good morning, guys.

Good morning.

A couple of questions if I could, I want to follow-up on some of Phil's questions on in particular to the Satcom. If I wrote the numbers down fast enough there that you were giving, it sounded like Satcom is down $20 million below plan year-to-date, but that for the year it might be $15 million. Is that kind of the timing item you were getting out of just increased demand?

Yes, Ric, just to clarify, that $28 million year-to-date was the amount that we under for Satcom as well as the department operating expenses. And then for the year, we expect Satcom to be $15 million below the budget. And just as a reminder, it's growing, of course on an absolute basis from second quarter, and third quarter will grow again, and fourth quarter as the demand grows, but it's still even with that growth in absolute terms It's RUNNING below plan along the lines I talked about.

Sure. And as far as versus plan, is that your internal plan, or is that kind of the plan you would have to communicate in the Street, is it doing like, significantly better than the internal plan as well?

Yes, no, that's versus the internal plan, so…

Okay.

And so, and we've talked about the EBITDA exceeding expectations, certainly is true versus the Street, but it's also true based on the internal budget, because of these expenses coming in below plan and we talked about that, on the last call that part of that is due to the great work by the engineering team which we put policy management in place and as we introduced new network elements like modems, that helps the overall usage to deliver the same user experience. So, a part of that has been the benefit of that kind of engineering work.

Okay. And again, in the early prepared remarks, Oak, you might have mentioned something about revenue hit in fourth quarter from a third-party payer, can you help us frame that, what kind of size you're talking about which line item that would hit?

Yes, it's a couple of million, and it's -- I'll tell you it's iPass, which is, you know, it's pretty public how the financial troubles that their parent company is in.

Okay. The last one from me, obviously, it's up to Delta to make the announcement, but what kind of timeframe should we be expecting updates from Delta kind of a review of unlimited Wi-Fi, is there a timeline you can at least poised to keep watching for?

No. I go down to Delta pretty regularly, and it's pretty well articulated to me that they prefer to make those announcements themselves. So, we're going to see to their wishes. Our job is to support them operationally and let them manage the program commercially.

Sure. And any final update on the MAX delays, how it affects, your business looks like it's slipping out into 1Q obviously, but just kind of help us update the thought of what MAX delays are meaning to not just installs, but then also service revenues?

Yes, I'll let Barry get to the service revenue component of it, but I don't know that we really calculated. We don't have a lot of matches. I mean, we've got, like I said, there's 36 in backlog, which includes the seven that have already been installed. So we'd have, you know, presumably ARPA already from 36 more aircrafts, you can take an average ARPA number and multiply times that would kind of be the hit I think, I'm sure, Max planes. And then of course, they are the planes that are not being given to us for installs. It's kind of hard to quantify that exactly. We actually try queue to this call, because when the airlines start delaying things, often there is a raft of reasons, MAX delays might be one of them, right? They're not going to get the MAX. So they need to keep some other plane service and can't give it to us for a two-day install. So we can't really quantify that, but I would say, there's been roughly 100 installs that got pushed out on us this year. MAX is probably 25%, 30% of those, something like that.

Yes.

That's what we sort of roughly estimate.

And Rick, the revenue impact is really very small.

Yes.

Yes.

At least for now, for sure, and obviously, the MAX is a big part of our future. Once we are line-fit on that, that aircraft, that's an aircraft that will be -- there will be a lot of those manufacturers presumably, and it'll be one of the leading aircraft in the world in terms of unit counts. So, line-fit on that is very important.

Great, thanks for the answers.

Thanks, Ric.

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

Good morning, Barry, and Will.

Good morning.

Hey, Louie, how are you?

Not bad. Free cash flow generation has never really been associated with Gogo, and appropriately you announced further measures to improve free cash flow on this earnings call on top of this quarter's strong performance. Is the general plan to refinance your debt in June of 2021, assuming that you're still an independent company then?

Yes, let me take those one at a time, Louie. First, on the question about improvements of free cash flow, yes, the drivers of that have been increased EBITDA, the working capital management, and the benefit from lower airborne equipment investment. What I tried to say is that, we've had a really an really extraordinary improvement in free cash flow of $207 million in the first three quarters. That that improvement over last year will decline as we exit the year for the reasons I mentioned. So, we have over $50 million interest payment in the fourth quarter, and we also expect there to be a use of cash from working capital in the fourth quarter. So, that'll take the improvement year-over-year in free cash flow performance down from where it is year-to-date, but still we feel very good about achieving at least $100 million improvement year-over-year. Regarding your question on refinancing, yes, because when we did the refinancing of the $925 million, we purposefully took a slightly took a lower-term and we could have taken five years. So we did a five-year term with a two-year non-call period and it's with the understanding that that would enable us to refinance sooner, we expected at that time and still do for continuing improvements in the operations. And even though we got a good improvement in the interest rate, during the last refinancing, we expect to continue to be able to be in a position to refinance for the balance sheet at more and more attractive rate. So, in terms of the timing of the next big event is the maturity of the 6% convertible notes, which is in May of 2022. So you could look to us, getting something done with that in more than a year in advance of that is the way we think about that. So that puts you into getting something done by early 2021.

Sounds good. And now I have an extended high level industry question, Oak, I want you to address the topic of industry pricing power and negotiating leverage. It seems that when airlines had your ATG solution or no in-flight Wi-Fi solution at all, it seems that the airlines had all the pricing power and that manifested itself with how the airlines especially your largest partners, pressure you for heavy subsidies, which is why you accumulated over a billion dollars of debt. Now that satellite antenna across the industry is now on over 8,000 planes. Is there any evidence that airlines have switched a material number of planes from one Satcom antenna to another and even if the Satcom solution is considered poor, is there any evidence of switching from one Satcom provider to another, so whereas the airlines brutally exercise their pricing power over Gogo for the past decade. Is it possible that all of the in-flight connectivity service providers have some degree of pricing power? Now when negotiating contract amendments since they have a Satcom antenna that seems very difficult to switch off?

That was a rich and long question. So I think in the early days, we would subsidize antennas heavily in order to win airline, in anticipation and those are usually turnkey deals where we then had the commercial right on the aircraft to sell our product and to bring in third-party payers et cetera and get the world is obviously switching more to an airline directed model, where the airlines want to control more of that, especially the large airlines and so they're getting probably more sensitive on costs. They never had costs in the turnkey model, but they do have costs in the airline directive model because they're the ones that are paying us for sessions are getting a sponsor to pay us. So I think that there is less sensitivity on the equipment side, most of our deals today are not heavily subsidized. Very few of them are, maybe there's still some old deals abroad right that were somewhat subsidized a little bit but there are new deals are pretty much all costs, are very close to cost on the equipment. And then there I think the airlines are going more price sensitive on the tests and especially as they look at going free. So we are very focused on driving our unit costs down, our Satcom unit costs down and with 2Ku and other ways of delivering more efficient solutions to the airlines and our competitors can and so I think that might answer your question. On the renewals, the renewals of these contracts are long contracts generally. So there have been very few renewals. We did renew American Airlines earlier this year because they have unusually short contract with us. And we announced that a quarter call and they were I failed it less price sensitive than they've been in the past, but as I said, I think that service pricing is going to be where there's going to be competition going forward. It makes sense, Barry?

Okay.

Thanks, guys.

Thanks, Louie.

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

Good morning. This is Landon Park on for Simon. I was just wondering if you could expand on any other conversations you're having with your partners around offering free Wi-Fi, and you also made some illusions to tightness in the Continental U.S. satellite supply market. So how should we think about your ability to meaningfully ramp your service offerings in North America, and when new supply might be coming online to support new services?

Yes, I think that the - what I was alluding to was that -- 20-9E, which had 9.3 gig of KU on it, mostly it went out of service earlier the fair amount of capacity out of the U.S. market, but there's capacity for what we're trying to do. Right now, we are still in negotiation with a number of players. We got eight different suppliers we're working with, and we're focused on getting the right pricing with them and we're able to start a lot of competition between them. So we feel pretty good about that. That's the capacity part of your question, and what was the other part of your question?

Any other conversations you're having with your partners around free Wi-Fi…

Yes, I mean, it's the conversation every airline of course, some of them think it's great and some of them are scared to death of it, but feel that they may have to react if one of the big majors goes free, what are they going to do? They're going to probably have to go free as well. So I think free will sweep across the industry over the next, say, five years. Different airlines will do that differently. Lower cost airlines are not going to give away high quality sessions probably, but they're probably going to give away something. And they will be everything in between. So yes, it's a major airline stock.

All right, and one last one. CA-NA ARPA was modestly down year-over-year, how should we be thinking about that as we move into 2020 and as we start to fully lap the American de-installs.

Yes. So, as you look at this quarter versus last land, and that doesn't reflect the impact of American Airlines, their full shift to the airline directed model. Also in the second quarter did have a onetime benefit from the renegotiation of that contract that we talked about on the last call. If you look at that quarter, also excluding American Airlines, it did include in the second quarter of the revenue from the distressed customer that was described. And so we're not accounting for that revenue until we see what happens with them. And then there's some seasonality of it in Q3. And as we look forward to 2020, we will still see that impact American Airlines and that'll be with us on a comparable basis through the second quarter and we see our sort of flattish from the current level. But I would point out that we do as we said expect revenue growth and CA-NA in the 2020. And then, of course, you know, the biggest discontinuity and all of this is a major airline going for you, other airlines going for you, which is going to completely change the level of take rates and as we go forward, and so that that really has been what we've been playing for, since two key you got established and, and putting in a much better pipe to the plane. So that's such an exciting development for us.

All right, thank you very much.

Thanks, Landon.

Thank you. Our last question comes from Greg Gibas of Northland Securities. Your line is open.

Good morning guys. Thanks for taking my questions and congrats on the quarter. I understand you didn't want to say too much here, but when should we expected to see the installs from the newly signed airlines to begin and can you really give us a better sense of how large that fleet sizes on a relative basis maybe?

Install start in 2020, and I think if I start talking about relative size and geographies, people probably factor too much in on what the airline is. And I don't want to do that because last thing I want to do is piss them off on the day we are signing the contract.

Fair enough. And then secondly, it looks like you continue to have that dynamic of new airlines and rest of world that install 2K. You would have roughly half the rate levels that we have seen on seasoned aircraft. So I guess I was just kind of wondering roughly how long does it take for those new airlines to reach those seasoned take rate levels. And is there any color you can provide on how those take rate grow over time and when we can start to see the rest of the world take rates start to improve again?

Yes. So, you are right, Greg, and it's about half as we look at that, so -- and it's for the reason that you pointed out. I mean it actually varies a fair bit by airline, I mean generally it's several years, but there have also been airlines where it can happen faster, so -- particularly in a world where there is an impetus to go free. So, as airlines do that, and now that that's out there and some airlines are doing that internationally that in some cases can accelerate it, but generally, we for internal purposes do model that to take several years. And there are two parts to that that matter. One is that the full fleets really need to be installed because an airline is not going to promote the WiFi service until they can demonstrate they offer it on every plane. So, you don't want to get on a plane where it doesn't have service. And then secondly even when once the service or once the planes are fully installed, it generally take some time for them to sort through exactly what their offering is going to be and they tend to tweak that and leg in into their ultimate WiFi offering.

Yes. I mean I would just add that that international wide body fleets that are fully installed tend to have our highest ARPA numbers, but they are the hardest to install. They are traveling international groups, because they are really utilized very heavily and getting them out of service to install takes more time. So, some of our great European brands we have been installing for two years so and we have still got time to go in order to get them fully installed. And again, it's really because those aircraft spend so much time in the air that it's harder than with the domestic fleet where [indiscernible] knows the tail and just bang in and churn them up. So, I think they are longer, but the reward is much better, is the way I look at it.

Got it. That's helpful. Thank you.

Thanks, Greg.

Thank you.

All right.

I would now like to turn the conference back over to Mr. Oakleigh Thorne for any closing remarks.

Thank you, and thank you for attending our Q3 2019 earnings conference call. I would like to leave you with a few thoughts. First, we have a very strong cash flow generating business in BA. Not only does it have a unique competitive advantage by virtue of our spectrum ownership but it's also a relatively un-penetrated market and has amply runway for growth. Second, Commercial Aviation Rest of World is growing. It's also an extremely large and un-penetrated market. And with our global 2Ku platform, our progress in line-fit and our strong backlog we are well positioned to win our share in that attractive market. Third, Commercial Aviation North America revenue is bottoming out as the impact of American airlines de-installs and their conversion to the airline directed model is finally model is finally behind us and we expect to start growing revenue again next year. Fourth, we strengthen our balance sheet given our sales strategic flexibility by pushing our Senior Notes out to 2024 and further strengthen our balance sheet this quarter by closing our $30 million ADL. And finally by virtue of our industry-leading market share and our asset-light operating model, we are well-positioned to take advantage of the opportunities affords to us by the satellite industry, and we look forward to demonstrating that to you in the quarters to come. Thank you again for your time, and look forward to talk to you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.