Varvara Alva - VP, IR & Treasurer Michael Small - President & CEO Norman Smagley - EVP & CFO

Ava Zhang - JPMorgan Armintas Sinkevicius - Morgan Stanley Dick Ryan - Dougherty Andrew DeGasperi - Macquarie Research Andrew Spinola - Wells Fargo Securities Lisa Friedman - UBS Louie DiPalma - William Blair & Company Jon Carmel - Arbiter

Welcome to Gogo Inc.'s First Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Treasurer and Vice President of Investor Relations, Ms. Alva.

Thank you, Andy and good morning, everyone. Welcome to Gogo's First Quarter 2015 Earnings Conference Call. Joining me today to talk about our results are Michael Small, President and CEO and Norman Smagley, 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 earnings press release and are more fully detailed under the caption risk factors in our 10-K which was filed with the SEC on February 27, 2015. In addition, please note that the date of this conference call is today, May 7, 2015. Any forward-looking statements that we may make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. This call is being broadcast on the Internet and is available on the Investor Relations section of Gogo's website at IR. Gogoair.com. The earnings press release is also available on our website. After Management's remarks, we will host a Q&A session. And now, it's my great pleasure to turn the call over to Michael.

Thanks, Varvara and thank you all for joining us on the call today. Once again, Gogo had an outstanding quarter. I want to spend a few minutes to give you my perspective on in-flight connectivity and activity and why Gogo wins, before I get into the details of the quarter. It's now been about three years since we decided to go global. At the time, that decision seemed fairly obvious for the long run, even when we were focused predominantly on passenger connectivity. Now that the vision for in-flight connectivity has moved beyond the passenger to the all-encompassing connected aircraft, airlines increasingly demand connectivity everywhere their planes fly, maintenance and repair service wherever their planes land and an exceptional level of quality and reliability for these mission-critical communication services. Global scale has absolutely essential to meet these requirements. And as the concept of connected aircraft takes off, airlines also demand the most bandwidth at the lowest cost. Unlike service providers on the ground, there's no supplier community for hardware that supports what we do. So it's essential for and aero-communications provider to be highly specialized and invest in R&D, in addition to having global scale. I believe Gogo is only service provider in this industry that checks all the boxes required to be the leading global aero-communication service provider. We have larger scale, we're global, we have industry-leading R&D and network engineering capabilities and we have nearly 1,000 smart, specialized and passionate employees around the world. Our passion for this industry and our scale and experience enables us to deliver highly reliable and sophisticated solutions. As far as technology goes, our ATG/ATG-4 network was the first broadband solution that really worked. With growth in service adoption and data traffic, we need to move beyond this first generation solution and 2Ku does just that. 2Ku is our second generation technology. It is truly global, offers multiples of ATG's capacity and does this at half the bandwidth cost of traditional Ku. 2Ku makes Gogo and our industry truly global. In terms of coverage, capacity, cost and reliability, we see no competing solution that comes close. We're aggressively working to deploy our 2Ku solution. Even with the superior technology in hand, we're not sitting back; we're also busy working on our third-generation technology. Why? Because this is what the market leader does. No one will bring more capacity at lower cost to an aircraft than Gogo. So why am I laying this out you? Because these are the ingredients for profitable leadership in our industry, just as they are in other industries that serve aviation. Leading aircraft manufacturers, engine manufacturers and avionics companies are all global and the top two hold most of the market share and make most of the money. The seems to be true for aero-communication service providers and we at Gogo are playing to win. Let me give you a few highlights for the quarter as we continue to execute on our three main strategic objectives; add new aircraft, bring more bandwidth to the sky and hit our numbers. First, aircraft adds; over the last couple of months, we had two major customers re-commit to Gogo and expand their relationship with us. NetJets announced its selection of our Universal Cabin System or UCS, smart router media server for up to 650 aircraft. Delta signed a contract to install 2Ku on 250 domestic aircraft and at least 25 new international aircraft. These are great validations by aviation industry leaders of two of Gogo's latest innovations, UCS and 2Ku. Turning to aircraft installs for the quarter, we brought over 300 broadband aircraft online, about 130 at CA and 190 at BA. We also announced the introduction of two new connectivity systems for the BA market, ATG 8000 and ATG 1000 which we expect will further drive BA ATG sales into aircraft online. It is clear to me that Gogo continues to lead the industry in aircraft wins and installs. I fully expect to see more aircraft awards soon. Now, moving to our second goal, bringing more bandwidth to the sky, we finished the quarter with 730 aircraft equipped with our capacity-enhancing ATG-4. This represents roughly one-third of our CA-NA installed base of 2,200 and nearly 50% of the data traffic. We know ATG-4 is helping with our capacity crunch and we will continue with ATG-4 upgrades. We will also continue price optimization to manage capacity. Starting in 2016, we will begin to get significant capacity relief as 2Ku installations ramp up. We're making very good progress in getting 2Ku to commercial production by the end of this year. We have installed a 2Ku radome our own Boeing 737. It's going through certification now and we expect this first 2Ku-equipped aircraft to be flying this summer. Now, to address our third goal of hitting the numbers. Q1 was a record revenue in adjusted EBITDA quarter. Our revenue increased 21% to $116 million and service revenue grew a very strong 32% to $95 million. CA North America segment profit reached a 13% margin, while combined segment profit for CA-NA and BA reached a 23% margin. Finally, the placement of convertible notes in Q1 added $212 million in net proceeds to our balance sheet. In conjunction with the convertible, we entered into a prepaid forward contract, making this funding anti-dilutive until our share price gets into the mid-$40 range. So, in sum, this was an outstanding quarter all around for Gogo. Before turning the call over to Norm, I want to emphasize three key points. First, in-flight connectivity will be a large global business, much larger than we thought only a couple of years ago before the entire aviation industry galvanized around a vision for connected aircraft. Second, Gogo has industry-leading R&D capabilities, scale and experience to capitalize on this large and attractive opportunity. Third, our business model is demonstrating inherent scalability, paving the way to profitability. We're in the early innings of what I expect will be the world's fastest global communication infrastructure deployment yet. Again, thank you for joining the call and I'll turn it over to Norm to get into the financials.

Thank you, Michael and good morning, everyone. I can't tell you how happy I am to say that for the eighth quarter in a row and let me repeat that, for the eighth quarter in a row, we hit record revenue, up 21% to $116 million. Service revenue grew even faster, up 32% to $95 million. Adjusted EBITDA grew faster yet, up 54% to a record $8.2 million, representing a 7% margin. Cash CapEx increased $3 million to $32 million for the quarter, including $6 million for the buildout of our downtown Chicago location to consolidate our CA facilities. Our cash balance at the end of Q1 stood at $400 million, reflecting the $212 million of net proceeds from the convertible notes. In short, we're firing on all cylinders. Turning to our business segments, CA North America service revenue was up 28% to $72 million for the quarter. This was driven by a 22% increase in ARPA and a 7% increase in aircraft online. The 22% increase in ARPA to an annualized 134,000 was driven primarily by an 11% increase in the average revenue per session to $11.73 and growth in Gogo Vision and other service revenue. Though reported connectivity take rate for the quarter of 7.2% was unchanged from the first quarter of last year, the underlying take actually increased about 10%, excluding the impact of sponsorships. The 7% increase in aircraft online to 2,200 was driven by installations for United, American and AirCanada. CA segment profit grew 66% to $9.6 million and the segment profit margin expanded from 10% to 13%, driven by the scalability of our operating infrastructure. Now turning to BA, service revenue of $22 million was up 38%, driving total revenue to a record $42 million for the quarter. Our ATG aircraft online increased 33% to nearly 3,000 and ATG service ARPA increased 8% just under 2,200 per month. BA equipment revenue of $20 million was down $3 million, primarily due to changes in the ATG product mix, including normalized sales of our text and talk product. BA segment profit of $16.8 million was up slightly from last year. Segment profit margin of 40% was down 3 percentage points, as a result of the changes in product mix I discussed earlier and higher operating expenses. Finally, let's move to CA-Rest of World. We installed an additional 31 Ku-based aircraft and reported $1.4 million in revenue for the quarter. There were two factors that impacted our reported revenue that I would like to highlight. First, certain CA-Rest of World transactions, previously forecast as revenue, were accounted for as a reduction to cost of service. Second, several of our intervals our Ku-equipped aircraft ended up flying North America routes, so the revenue from those flights was recorded in our CA-NA segment. Adjusting for these two items, Q1 revenue for rest of world would've been approximately $2.6 million. CA-Rest of World segment loss of $18.3 million was up from $16.9 million a year ago, but down $4.8 million sequentially. The year-over-year increase came primarily from higher sales and marketing expenses and higher expenses associated with our global Ku satellite network. Sequentially, the decline in rest of world segment loss in Q1 was partly due to lower STC and related design expenses, as we completed substantially of our required Ku-based STCs in the fourth quarter of 2014. We do expect to see an increase in ED&D expenses for the balance of 2015, as we obtain STCs for the commercial launch of our 2Ku technology with our airline partners. For the full year 2015, we're reiterating our guidance with one clarification. We estimate the reclassifications in CA-Rest of World I mentioned earlier to result in $5 million reductions to both revenue and cost of service with no impact to adjusted EBITDA for the year. Therefore, we have updated our CA-Rest of World revenue guidance to range from $10 million to $15 million which flows through to our consolidated revenue guidance as well. We maintain all other guidance, including our adjusted EBITDA guidance of $15 million to $25 million for the year. To wrap up, I'm extremely pleased with our financial and operating results this quarter. With strong revenue and profitability growth and plenty of cash on hand, we're well-positioned to execute on our continued global expansion. Operator, we're ready for our first question.

[Operator Instructions]. And our first question or comment comes from the line of Phil Cusick with JPMorgan. Your line is now open.

This is Ava for Phil. Thanks for taking the questions. Michael, can you share with us any update on the international deals? Do you feel like there's a need to subsidize? And I have another follow-up.

I stated in my script we're very optimistic and fully expect additional international contracts and we're not disclosing the terms of those contracts.

Okay and then maybe another question would be, you went to the Hamburg air show. Can you share with us the reception to the 2Ku argument at the air show? And is there any strong interest that you have seen from the commercial airlines?

We're getting exceptional response to 2Ku. As I've said over and over again, it is the solution that checks all the boxes; cost, capacity, coverage and reliability. It's the most efficient, it's the fastest, it's the best global coverage and it depends on many, many Ku satellites that are out there already and we've already placed over 300, really north of 350 are in the marketplace and announced already which is a pretty good first year out of the blocks. There is nothing else in the marketplace that comes close to 2Ku and I think that many of the airlines are realizing that.

Do you think there is a strong interest that could potentially convert into a world win or do you anticipate a pickup in RFP from here?

I'm not sure I follow. We expect additional announcements for international wins and we think 2Ku will be the primary technology around those announcements.

And our next question or comment comes from the line of Simon Flannery with Morgan Stanley. Your line is now open.

This is Armintas for Simon. I was hoping to get an update on the 14 Gigahertz auction following the issuance of the convertible. And also, with the 2Ku installation on your own aircraft, if you could give us some color on how the GTO trial went, that would be helpful. Thank you.

Okay, so on 14G, the FCC held another round of hearings regarding the safety and security issues and I think that all went very positively and we're back into the waiting game but would expect that sometime soon we'd get a Report and Order. We continue to remain very interested in that it's rare in the wireless business that you see 500 megahertz coming your way and you get very excited when those moments come. So we're looking forward to that, but have no special insight into when the Report and Order will actually appear. And then the second half of the question was -- GTO, we have no additional test results to share at this stage, but everything's on track and we have every reason to believe we'll see the performance we've been talking about, initially capable of 70 megabits per second. As the high throughput satellites come, it will reach 100 megabits per second, but it's not just the speed, it's the cost, it's the reliability that it depends on multiple satellites and that it truly has global coverage that I think makes 2Ku so special.

And one follow-up on text and talk, if the contract or agreement with T-Mobile is still ongoing and if you have any plans for a commercial launch?

We still have the contract with T-Mobile is still going and we have yet to make any announcements about commercial launch. I would say that text and talk is substantial business for us in the business aviation side. It's on many aircraft. We actually are seeing some interesting things like very high percentage of our BA customers have chosen to add it. The usage of talking is relatively low. They wanted to have it there, but the world has moved on from talking. It's emailing and its texting. Talking is becoming a thing of the past.

And our next question or comment comes from the line of Dick Ryan with Dougherty. Your line is now open.

Michael, can you give us an update on line fit, where you are in that progression?

Yes, we've made exceptional progress with both Airbus and Boeing on line fit. It's a long process, but it's happening. The driving force is as you sign up for airlines for your technology, the more excited the airplane manufacturers are to support line fit. Our ATG solution is -- provisions for that are already line fit operable with Boeing and in their catalog and you will see a steady progression of more of our offerings getting to the catalogs with both Boeing and Airbus.

Any timing on the satellite offerings?

We're not prepared to make those announce dates yet, but I would say it's happening as fast as it can happen at this stage. It's inherently, for very good reasons, it's a complex production process to make an aircraft. They are not going to allow any one of their partners to slow down the process, so it's rigorous. You've seen we've obtained is AS9100 certification, that's part of it. It's all happening and it's happening as rapidly as it can happen.

Norm, I think you mentioned a $6 million figure for the new headquarters, but can I get the airborne equipment in first quarter?

I'm sorry, what's your question?

Airborne equipment.

Yes, what about it?

Just what the level was? I was trying to compare it. I think it was $28 million in Q4. I was just trying to see what the airborne equipment level was in Q1?

Yes, we don't disclose CapEx by component, Dick.

Okay. Just optically, very strong first quarter, obviously. Your EBITDA as well over half way to your bottom end of your guidance. How should we look at kind of the OpEx going forward and some the other investments you need to make for the next three quarters since you've had such a strong performance out of the gate?

We did have a very strong first quarter. We're not updating guidance or EBITDA or anything else other than we talked about in the script at this point.

And our next question or comment comes from the line of Andrew DeGasperi with Macquarie Capital. Your line is now open.

So first question on your take rates, I think this was the highest number you've had in over three years. I was wondering if you could maybe walk us through what the biggest driver was and if this is a sustainable rate or if anything could go even higher? And then secondly, there were reports that Inmarsat was looking to build an air to ground system in Europe. I was wondering if there's any truth to this or do you think it's feasible? Thanks.

Take rates, we've had a solid quarter, even as we have raised our prices to the passenger. So to be up 10% year-over-year adjusted for the sponsorship activity in the face of a fairly significant price increase shows there's tremendous underlying demand. Take rates ultimately will be driven by bringing more capacity online. The best thing to happen to take rates will be ATG-4 deployment then also 2Ku and that's what'll drive take rates primarily. There has been a long rumored European ATG system that Inmarsat has been proposing and it's still possible it will be built. We don't think it's arriving anytime soon.

Our next question or comment comes from the line of Andrew Spinola with Wells Fargo. Your line is now open.

I wanted to follow-up on that question about take rates. With the extra capacity from ATG-4 that you're getting, are you passing a lot of that capacity along to the customer or do you have reasonable headroom left from those installs to potentially raise take rates further in CA-NA?

That's a balancing act. Some of the additional capacity goes to an improved experience for each customer, some of it goes to allow additional customers online. As we said in the script, why 1/3 of the planes have ATG-4 on them, just shy of half of the megabytes, half the data goes through the ATG-4 plane. So they have a combination of somewhat higher take rate and somewhat higher megabytes per passenger. Even so, there's demand for many, much, much more. The demand for bandwidth is insatiable.

Given the extra capacity, do you think you'll continue to raise prices or need to raise prices to limit take rates or do you think that we'll see pricing sort of flattish for the rest of the year from here?

So we just implemented, in early April, a fairly significant price increase after having tested it through the first quarter. My long-term hope is we get out of the price increase business and we get into the bring the more bandwidth to the air business. But until 2Ku gets into the marketplace in 2016, we're going to have to do a balancing act here. So there may be some more price optimizations that we'll have to do over the course of the next year or so.

Yes, definitely worse problems to have. Norm, a question for you on this accounting change. Was there any lost revenue associated with the accounting change or was it all just the planes being moved to North America?

No, no lost revenue at all. We recognize revenue between the two segments based on the flight origination and destination. So, if a flight begins and ends in North America, it's a North America revenue. If it either begins or ends outside of North America, it's Rest of World revenue. So, strictly a classification between the two segments

Right. Can you give us any sense of how much of the cost of service benefit was to Rest of World in the quarter?

You know, we don't disclose, at the segment level, that kind of information. So it wasn't gigantic.

We did get the reclass for the year, though.

We did estimate $5 million for the year.

Oh, you did?

Yes, we did say that on the script.

Okay.

That's why we took CA-Rest of World revenue down $5 million and cost of service down $5 million.

Right, but no change to the EBITDA guidance. Any reason for that?

It's strictly a movement within the P&L and which category you're recognizing it. Just like we recognize our equipment revenue, we don't recognize equipment revenue, but we take it as a credit to cost of service, so it reduces our cost. This is the same thing. We can recognize, though, that those payments as revenue, instead, it reduces our cost of service. So bottom line impact is zero.

Yes, I'm sorry. That makes perfect sense. Last question for me, I'm actually surprised you're able to fly the international planes over the U.S.. I didn't realize you had a satellite presence over the U.S. just yet. I ask partly because I've been wondering about how much maybe that's impacting your cost of service without too much revenue being attributed to that. So what's the status of your satellite presence in the U.S.?

So we have satellite coverage since 2012. In terms of cost of service, when the capacity was not being utilized, it was going to cost of service in Rest of World. To the extent that we're using capacity in CA-North America, it will go to CA-North America cost of service.

We needed a global satellite network. A plane from Atlanta could fly to Japan and it's going to go over the U.S. for a while, so there's just a lot of -- we had global coverage since 2012 which is why you've seen the big cost of service in the international operations which now we're finally getting to put to use.

Our next question or comment comes from the line of John Hodulik with UBS. Your line is now open.

It's Lisa for John. I just wanted to ask about your target that you had previously discussed, about roughly 500 new installs this year, split 75/25 between U.S. and Rest of World. It looked like first quarter was particularly strong in CA-North America and so I'm wondering if that's going to be the run rate going forward or if there's any remaining AirTran deinstalls or anything else that will affect that with seasonality or anything else going forward?

So our guidance for 500 to 1,000 Rest of World aircraft was only--

500 installs for this year.

For this year, I'm sorry. I'm sorry. We're roughly on track for that. We did 130 CA net new installs in the first quarter, so we're reasonably on pace for that.

You have to remember installs do slowdown in the summer months, Lisa, because airlines don't want to take their planes out of service. So for Ku, it will slow down.

Yes, there is nothing inherently regular about when install is done. It's when planes are available to us. It's when scheduling happens, it's when the deals are cut. So you will not see the same consistency in installs that you see in our revenue and our [indiscernible] where we're very predictable recurring revenue business. But the installs happen when they happen.

Right, sot it sounds like it will be sort of lumpy through 2Q and 3Q, particularly due to the peak summer travel season. And then I guess the question is, does the installs that are remaining from AirTran, is there any expectation of when those will happen or is that, again, just as planes are available?

We don't do the deinstalls.

That's up to Southwest, then?

Right, yes.

There is very few of those left. That's essentially done.

Our next question or comment comes from the line of Louie DiPalma with William Blair. Your line is now open.

This is Louie on behalf of Jim Breen. The margin for the Commercial Aviation North American segment increased for the second quarter in a row and reached an all-time high. I was just wondering, has the revenue share with the North American airline partners stabilized? And on a related note, do you need to still obtain more STCs for that business?

Rev share is stable quarter-to-quarter. What you're seeing is the leveraging of our operating infrastructure. As we've said many times on the calls, we have a relatively fixed base in our cost of service delivery, so as revenue increases, we continue to get more operating leverage.

Our next question or comment comes from the line of Jon Carmel with Arbiter. Your line is now open.

Question, the GAO put out a report asking the FAA to look into in-flight connectivity and cyberterrorism. What are you guys doing about this and are you partnering with any of your competitors to come out with an industry standard?

We take cybersecurity very seriously and although you have to do capture to get on our service and that's one of the many measures we take, we go through rigorous certification processes with the FCC and the FAA and we work with various governmental and industry groups to ensure that our systems remain secure.

And we have a follow-up question or comment coming from the line of Andrew Spinola with Wells Fargo. Your line is now open.

Michael, I thought it was noteworthy on the Inmarsat call the other day that they seem to be increasingly talking about an interest on their part in hybrid solutions, sort of ATG satellite. I'm wondering what your view is on that. Is it going to be a competitive advantage for you to have ATG and satellite potentially longer term? Or do you think the technologies maybe will be more suitable separate for different applications, different size planes, things like that?

I think there are a limited number of circumstances where there's a real advantage to having both on the plane. But it comes down to really, fleet by fleet, plane by plane analysis where it makes sense. You many need global coverage and then you need satellite or you need over water coverage. The only reason you'd add air-to-ground is if it really lowered your bandwidth costs in addition. So there will be some circumstances, long-haul global international wide-body fleets, they'd probably just satellite. Most regional RJs are going to be just air-to-ground and we see some situations in the U.S. where some planes fly to the Caribbean and they're almost always over land mass and then they may want ATG and a supplemental satellite solution, but even that's not always obvious to us.

A curiosity on my part, do you think that this sort of proliferation of options from Inmarsat, ATG, Epic, SES, ViaSat, things like that, all these different technological solutions is one of the main reasons that it seems to be taking longer for airlines to make a decision? Or do you think that it's just strictly the complexity of the decision that they're making?

Yes, I would add one additional factor is until 2Ku arrived, there was no great global solution, so not only was it confusing, none of them looked only attractive. Now we think there's one hits the cost, coverage, capacity and reliability boxes, checks them all, that makes it much easier for an airline to say yes. So the idea of in-flight connectivity was around long before Gogo's ATG solution was available, but it never worked because you never checked all the boxes. ATG checked all the boxes over North America. It now doesn't cover the rest of the world which airlines want. It doesn't have, with only 3 megahertz of spectrum all the tests they want, but that checked the boxes. The number one thing that's going to make the rest of the world take off is there's finally a technology that really works for the airlines

And we have a follow-up question or comment coming from the line of Louie DiPalma with William Blair. Your line is now open.

In the context of yesterday's live TV Amazon instant video announcement, Mike, can you generally talk about the capacity capabilities of 2Ku and how many simultaneous streaming users that it can support?

2Ku will have as much capacity and as much speed as anything in the marketplace and possibly more because our antenna is twice as efficient, possibly more because we're going to architect this specifically for aviation, rather than backyard dishes. So it's going to have the most speed and capacity of anything in the marketplace at the best cost.

I'm showing no further questions or comments at this time. With that said, I would now like to turn the conference back over to CEO Mr. Michael Small, for any further remarks.

Thank you, operator. Thanks, everyone for joining us. We're very excited about this quarter and we're very optimistic about what's to come. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect.