Gogo's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Gogo (GOGO)

Gogo Inc (NASDAQ:GOGO)

Q2 2013 Earnings Conference Call

August 7, 2013 08:30 ET

Executives

Varvara Alva - Vice President, Investor Relations

Michael Small - President and Chief Executive Officer

Norm Smagley - Executive Vice President and Chief Financial Officer

Analysts

Simon Flannery - Morgan Stanley

Phil Cusick -JPMorgan

John Hodulik -UBS

Jonathan Schildkraut -Evercore Partners

James Breen - William Blair & Company

Operator

Good morning. My name is Stephanie and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Gogo Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Varvara Alva, Vice President of Investor Relations.

Varvara Alva - Vice President, Investor Relations

Thank you, Jennifer. Good morning everyone and welcome to Gogo second quarter 2013 earnings conference call. Joining me today to talk about our results are Michael Small, President and CEO and Norm 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 the call we may make forward-looking statements regarding future events and future financial performance of the company. We caution you to consider the risk factors that could cause the actual results to differ materially from those in the forward-looking statements on the conference call.

These risk factors are described in our press release and our more fully detailed under the caption Risk Factors, in our final perspectives that we file with the SEC on June 24, 2013. In addition, please note that the date of this conference call is August 7, 2013 and 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 the call, we’ll 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 our website at www.ir.gogoair.com. The earnings press release is also available on our website. After management’s remarks, we’ll host the Q&A session.

And now, I would like to turn the call over to Michael.

Michael Small - President and Chief Executive Officer

Thank you, Varvara. I would like to welcome everyone to our first quarterly earnings call as a public company. Q2 was a record quarter in terms of financial and operating results. The second quarter also marked an important milestone in the history of the company. We started trading on NASDAQ on June 21st. I would like to welcome our new shareholders. I also want to thank you employees, who are the driving force behind Gogo’s success.

More than 20-years ago, Gogo started with the vision of bringing affordable mobile communication service to the business aviation market. Today as a result of our employees’ hard work and dedication that vision has expanded to bringing the Internet to the sky and technology and service that is transforming the aviation industry. This month we also celebrate the 5th anniversary of the launch of our broadband in-flight connectivity service for commercial aviation on American Airlines. In the last five years, we have managed to expand that service to nearly 2000 commercial aircraft across nine major airlines.

Now to our financials. I’m pleased to announce that today we reported record quarterly revenue of $79.4 million up 37% from the prior year period. We also achieved adjusted EBITDA of $3.8 million. In addition to having our service on nearly 2000 commercial aircraft across nine major North American airlines, we have more than 5100 satellite aircraft and nearly 1700 air-to-ground aircraft in business aviation. During the second quarter more than 77 million passengers’ boarded Gogo-equipped commercial aircraft. These are magnificent accomplishments and a testament to our success of our business.

Our turnkey business model, multiple technology solutions and expertise in building, running and expanding either air-to-ground or satellite networks provide a compelling value proposition to commercial airlines and to our business aviation customers. Our growth strategy is simple increase the number of aircraft and increase revenue per aircraft. We plan to drive revenue per aircraft by increasing the number of passengers to user connectivity service. We will also continue to expand the range of services we provide by offering in-flight entertainment and other in-cabin services to passengers, crew in the airlines around the world.

As you know, we operate businesses in three segments, Commercial Aviation North America, Business Aviation and the recently launched Commercial Aviation Rest of World I’ll discuss each. First, Commercial Aviation North America, we generated service revenue for the quarter of $49.3 million up 54% versus same quarter last year and a segment profit of $2.7 million up from a segment loss of $2.5 million a year ago. This quarter, we brought an additional 107 aircraft online bringing total CA aircraft to nearly 2000. At the same time, our take rate grew to 5.9% from 5.3% in the same quarter last year.

We believe that take rate and revenue per aircraft will continue to expand as a result of the growing demand for connectivity in the air. That demand will be driven by the proliferation of Wi-Fi enabled devices, increasing passenger expectation of connectivity everywhere, (full fleet) availability of our service more chronicle and lower cost bandwidth, the introduction of new services and growing Gogo brand recognition.

Let’s now turn to Gogo’s technology. I’m frequently asked how much capacity is left in the ATG network to support growth. In short, the immediate milestones in Gogo’s technology roadmap are cell site additions, fiber optic backhaul deployment and the rollout of our next generation technology ATG 4. At the end of the quarter, we had 312 aircrafts installed with ATG-4 and expect more than 500 by the end of the year.

I’m pleased with the performance metrics we’re seeing from the ATG-4 aircraft and we expect to complete more ATG-4 retrofits in the fall as airline demand for this technology remains high. ATG-4 is critically important for us to accommodate continued growth in passenger selections over the next several quarters. Finally, we’ll continue to invest in a robust technology roadmap for longer-term capacity enhancements.

I’m also happy to report that our network expansion in Canada is going as planned. Last year, we received a subordinate license for the spectrum located in the same band as our U.S. spectrum. We expect to activate our Canadian buildup by the first half of 2014, which will enable us to flight service to Canadian based airlines. It will also allows to expand coverage for our U.S. based airline partners and business aviation customers flying over Canada.

I’d like to give you a quick update on where we are with other in-flight offerings beyond connectivity. Our Gogo Vision product is currently installed in more than 1000 aircraft. We expect to achieve about 1500 installations and product commercialization by the end of 2013. This makes us the largest provider of wireless in-flight entertainment solutions in the world. Compared with embedded in-flight entertainment systems, our product requires much less maintenance and comes at a fraction of the cost and weight. For these reasons, airlines around the globe have a high interest in Gogo Vision.

Our in-flight text messaging service is also in development and we are excited about its prospects. We expect to be able to offer this service to our business aviation customers later this year into our commercial aviation partners and passengers in 2014. This product will contribute significantly to our objective for engaging all passengers with connectivity enabled services.

Finally, let’s not forget about our in-flight multimedia platform. This platform continues to be in high demand by advertisers and eCommerce partners. Through our cutting-edge multimedia platform, we provide advertisers and eCommerce partners’ access to an upscale, captive undistracted and highly targeted audience. During Q2, we were thrilled to host several partners including eBay, BlackBerry and Verizon to name a few providing them with high impact branding and advertising opportunities.

Google another one of our partners currently sell certain (indiscernible) devices with 12 Gogo’s Connections included. Our partnership with Google has been tremendously successful. Non-connectivity revenue that’s still relatively small reached $1.9 million this quarter more than double since last year. We believe this represents another great growth opportunity for us going forward.

Let me now turn to our Commercial Aviation Rest of the World business segment. We have made solid progress internationally to-date. In June 2012, we announced that Delta awarded us its entire international fleet up to 170 aircraft. Within six months, we secured the necessary Ku-band satellite capacity, developed the technology and entered into various production agreements. In May of this year, we received a Blanket license from the SEC to install up to 1000 Ku-based antenna systems.

As of June 30th, we had taken the regulatory steps required to enable our Ku system in more than 116 countries around the world. We are currently seeking FAA approval for our satellite Iridium installation. The FAA has increased its scrutiny industry-wide of Iridium installations to ensure continued safety of the aircraft. Gogo has been playing a leading role in providing the FAA with necessary documentation. While there are slightly more than 4,000 aircraft in North America, there are about 13,000 commercial aircraft outside North America. Boeing’s forecast its Rest of the world number to roughly double over the next 20 years. Currently the Rest of the World market is nascent and represents a large near term growth opportunity for us.

As demonstrated by third-party research as well as the increased activity by international airlines we have witnessed we believe that many airlines around the globe will make connectivity decisions over the next two years. Gogo’s unique ability to offer both Ku and Ka satellite solutions supported by our track record in the U.S. gives us tremendous credibility with international airlines. Following the $300 million in funding that we closed in the second quarter, Gogo is now well capitalized to extend long-term partnership agreement to leading international carriers.

Now turning to our Business Aviation segment, which is our hidden jewel. This is truly a great business. Following the introduction of Gogo Biz in 2009, we have begun to transform this equipment based business into a service revenue based business. As of June 30th, we reported close to 1700 Gogo Biz aircraft online and more than 5100 satellite aircraft online. There are approximately 12,000 business jets in the U.S. and only 14% are equipped with Gogo Biz broadband Internet. As the Business Aviation industry increasingly views Internet connectivity as a must-have service Gogo Biz has a long runway for growth.

In early April, we announced the completion of the Airfone acquisition. Airfone operates in air-to-ground network over 1 megahertz of spectrum. They provide low bandwidth telecommunication services to approximately 1,000 customers. We publicly announced our plan to shutdown the Airfone network by the end of 2013 and convert Airfone customers to our services. This integration is going as planned and we look forward to serving our new customers. We are still evaluating the best use of the 1 megahertz of spectrum, which will be available once the migration of the Airfone customers is complete.

In conclusion, I’m very pleased with our financial and operating performance for the quarter and for the first half of 2013. We continue to execute well against our strategy to increase number of aircraft online and to increase revenue per aircraft. We are tracking well on AGT-4 upgrades. We are developing next generation technologies on schedule and we are aggressively pursuing international opportunities. Gogo is uniquely positioned to capture this large and growing market opportunity as we continue to bring the mobile internet to the sky both domestically and abroad.

Let me now turn the call over to Norm to take you through the numbers. Norm?

Norm Smagley - Executive Vice President and Chief Financial Officer

Thank you, Michael. Good morning everyone. As Michael mentioned, we achieved record revenue of $79.4 million for the quarter up $21.5 million or 37% versus the second quarter of last year. Our service revenue of $62 million increased $21.8 million or 54%, while our equipment revenue of $17.4 million was essentially flat decreasing $0.2 million. The service revenue increase is driven by 54% increase in CA North America service revenue to $49.3 million and by a 55% increase in BA service revenue to $12.6 million.

The CA North American service revenue increase was primarily driven by gross passenger opportunity or GPO and average revenue per passenger or ARPP. GPO increased to $77.2 million in the second quarter up from $65.5 million last year driven by an increase in aircraft online through almost 2000 up from 1565 a year ago. ARPP increased 31% to $0.64 versus $0.49 last year due to increases in connectivity take rate and average revenue per session or ARPS. The connectivity take rate increased to 5.9% versus 5.3% last year as our standard footprint increased passenger awareness and drove adoption of the Gogo service.

Average revenue per session increased to $10.38 up from $9.03 for the same period last year primarily due to price increases. Also towards the end of last year, we changed the retail pricing methodology of our Gogo Connectivity service from simple flight land space pricing to more sophisticated demand based pricing. Our take rate of 5.9% increased 0.6% versus the prior year and represents a sequential decline from the 6.2% take rate we reported in the first quarter due to seasonality.

Seasonality in our business is driven by the change in passenger mix between business and leisure travelers with the encouraging summer months and holiday periods. Since a higher portion of our users are business travelers the change in the business, leisure travel mix will affect take rate and therefore ARPP. Generally speaking the second and third quarters are the most impacted by seasonality and the smallest sequential revenue change occurs in the second and the third quarter.

As you know, our strategy is to increase the number of aircraft online and increase the amount of revenue per aircraft. To give you better visibility into how we are executing against this strategy we are introducing a new metric that we call average quarterly service revenue per new aircraft online or ARPA. In the second quarter of this year, ARPA increased 22% in the prior year to 25.6000 this year. The increase in total service revenue was also driven by an increase in BA service revenue of 55% to $12.6 million primarily due to more customers subscribing to our Gogo Biz service.

The number of ATG aircraft online increased to 1684 versus 1166 a year ago. BA service revenue also included $0.7 million associated with Airfone service approximately 1,000 aircraft, which we acquired in April of this year. Equipment revenue of $17.4 million for the quarter was $0.2 million lower than the same period last year due to $0.3 million decrease in CA Rest of the World offset in part by a $0.1 million increase in BA.

Let me remind you that our CA North America and Rest of the World segment generally do not record equipment revenue even if we receive payment from the airline. Based on GAAP, we record these payments from the airlines as deferred airborne equipment incentives on the balance sheet and amortize them as a credit to our cost of service. BA on the other hand does record equipment revenue. BA equipment revenue of $16.9 million was up $0.1 million from the prior year. For the quarter, we shipped 201 ATG Gogo Biz systems versus 182 last year demonstrating the demand Michael talked about earlier. In addition, we shipped 173 satellite based systems one less than last year.

Total cost of service revenue for the quarter increased to $31.1 million up 62% from $19.2 million last year. CA North America cost of service revenue increased to $24.7 million versus $17.2 million last year driven by a $4 million increase in rev share and increases in network operations expense, (indiscernible) transaction related expenses. BA cost of service increased to $3.7 million versus $1.1 million last year due primarily to increases in the number of ATG and satellite units online, higher average network utilization per ATG unit online and an increase in satellite service fee rates. Finally CA Rest of the World cost of service increased to $2.8 million versus $0.2 million last year due primarily to satellite transponder and teleport fees that commenced on October 2012.

Cost of equipment revenue for the quarter increased to $8 million up 11% from the $7.3 million last year primarily driven by an increase in personal cost within the production, technical support and quality assurance groups and then increased in the number of ATG units sold.

Total engineering design and development expenses increased 59.4% to $12.3 million for the second quarter versus $7.7 million last year. The increase was driven primarily by spending on a development of our next generation products and technologies and an increased in expenses associated with obtaining FAA certification for airborne equipment on the CA North America side. The increases in development of satellite systems and an increase in FAA certification related expense on the CA Rest of World side and an increase in spending on next generation products including the Aircell smartphone on the BA side. As a result of total – as a percent of total consolidated revenue the engineering design and development was 15.5% versus 13.3% last year as we transition to supporting three technologies rather than one technology as laid out in our technology road map.

Sales and marketing expenses increased 1.6% to $7.1 million from $7 million last year. CA Rest of World increased due to the build out of our international sales and marketing changes. We increased the support for growth of their business and expenses of CA North America declined. Overall sales and marketing as a percent of total revenue decreased from 12% last year to 8.9% this year.

General and administrative expenses increased 26.9% to $15.7 million versus $12.4 million last year primarily due to increases in CA North America and Rest of World. CA North America G&A was primarily driven by higher personal expenses to manage the growth of the business higher bonus and legal expenses. The increase in CA Rest of the World G&A was due primarily to an increase in personal expenses related to finance, HR, program management, the increase in legal fees to attain regulatory approval where satellite service and different jurisdictions around the world.

Consolidated G&A expense as a percent of total consolidated revenue decreased to 19.8% from 21.4% last year. Depreciation and amortization expense increased 29.6% from $13.7 million versus $9.2 million last year driven primarily by the increase in the number of aircraft online and CA North America and the expansion of our ATG network. We also recognized $0.7 million of accelerated depreciation where ATG components and certain aircrafts schedules were retrofitted with our ATG for acquire solution.

Other expenses in the quarter was $46.7 million compared with other income of $8 million for the prior year period. Other expense this year included $36.3 million of fair value derivative adjustment resulting from the liquidation preference and better than our preferred stock. As a result of the conversion as part of our IPO. The second quarter of last year includes other income of $8.5 million of fair value derivative adjustment resulting from an increase in fair value of our preferred stock.

Finally, other expense this quarter included $10.4 million of interest expense associated with the Amended Senior Term Facility. $10.4 million of interest expense this quarter included a one-time $2.9 million expense related to debt issuance cost associated with the issuance of the Amended Senior Term Facility. Interest expense from the prior year quarter was only $0.5 million because the credit facility was only outstanding for short-term in next quarter.

Our adjusted EBITDA of $3.8 million included segment profit of $2.7 million from CA North America and $10.5 million from BA partially offset by a $9.4 million of segment loss from CA Rest of World. Between CA North America and BA we generated $13.2 million were 16.7% in segment profit and $79.2 million of revenue for the second quarter. This compares with a $7.2 million or 12.5% segment profit of $57.4 million in the revenue in Q2 of last year.

Net loss attributable to common stock increased to $72.6 million versus a net loss of $13.1 million last year. The increase of net loss was driven primarily by the preferred stock related charges, increased interest expense and depreciation and amortization as I mentioned earlier. In our press release, we provided the definition of adjusted net loss for which we had to take the non-cash charges related to our preferred stock return and fair value adjustments.

We reported adjusted net loss to eliminate the impact of such items because we do not consider those indicative of on going operating performance and because of their non-recurring nature as a result of the conversion of all shares of preferred stock into shares of common stock in connection with our IPO. As such, adjusted net loss increased to $19.7 million for the second quarter versus $5.6 million last year.

Net loss attributable to common stock per share was $4.98 for the quarter versus $1.93 for last year. As the number of shares outstanding after the IPO, were used instead of the respected weighted average share amount, adjusted net loss per share would have been $0.23 for the quarter versus $0.08 last year.

Consolidated CapEx for the quarter of $32.6 million was up $15.1 million versus last year primarily due to increased airborne equipment purchases at CA-NA and CA-Rest of the World for both new installations in ATG-4 upgrades. Our cash CAPEX, which we define as GAAP CapEx net of airborne equipment purchases increased to $28.8 million versus $16.7 million for the last year. In addition to non-included in CapEx on April 11, 2013, we completed the acquisition of Airfone for a purchase price of $9.3 million.

In conclusion, we are very pleased with the financial and operating performance of the business. We ended the quarter with $312 million of cash on the balance sheet. We are well capitalized to aggressively go after the large international opportunity Michael talked about and to continue to invest in next generation technologies to expand our leadership position in the aviation market.

I’d now like to spend a few minutes on business outlook and provide some full year guidance. We expect total revenue for the year to come in between $305 million and $315 million. By segment, CA revenue is expected to be between $188 million and $193 million, BA revenue between $115 million and $120 million and CA revenue under $2 million. We expect our adjusted EBITDA for the year to be between $0 million and negative $6 million and cash CAPEX to be between $115 million and $135 million. Our full year 2013 adjusted EBITDA guidance reflects increasing investment in CA-Rest of the World particularly in the second half of the year.

Operator, we’re now open to take questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery – Morgan Stanley

Thanks very much. Nice quarter. Could we – Michael, could we start up on the international side you talked about the FAA Iridium testing and the Delta contract. When do you think, we can start to see the Delta fleet coming online given some of its I don’t like there were some, which was taking longer than expected is there anything this year, is it early part of next year? And then if you could just provide a bit more color about your conversations with the international airlines you talked about a two year timeframe where there will be a lot of decisions made, where are we now and then when do you expect to be able to sign some new contracts there? Thanks.

Michael Small

Okay. Thanks, Simon. We - our two objectives internationally are to start flying commercial satellite aircraft and the gating item there and our first objective is FAA approval of Iridium installations as this becoming increasingly obvious the FDA has increased its scrutiny by conjecture and as that - they see that virtually all aircraft in the world will to getting large scale Iridium’s as connectivity proliferate and rightfully they should be very concerned about the safety of flight. So, we’re working with them. We’re targeting and install this fourth quarter. We indicate that in our Q but there still are final concerns to make sure we wrap up with the FAA. We think it’s in our interest that we do this safely. Its shareholders interest so we’re working in close partnership with the FAA. On the second question, international expansion, we’re talking to the world’s leading airlines. We’ve lots of proposals out there. We’ll announce them as soon as they come through. I’m not prepared to say anymore than that at the time.

Simon Flannery – Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Phil Cusick with JPMorgan.

Phil Cusick - JPMorgan

Thanks. I wonder of course you can talk about the ATG-4 upgrade. Can you talk about what the CapEx split there is for the upgrade with carriers? And what have you seen in terms of change in usage and up tick on flights that have been upgraded?

Michael Small

So first on the CapEx we did describe during the Road Show that some of our earlier contracts we owe the carriers upgrades on some of their fleets not necessarily all their fleets and all the situations that carriers are paying for the upgrade we have not broken our percentages on that left fall but it is driving a fair amount of our CapEx currently and into next year to doing the ATG-4 upgrades. What we have seen is we now have a large enough sample of aircraft with the service the ATG-4 on it 312 as of the quarter end. We know it works as designs at the stage we are seeing the increasing capacity as predicted a lot of the aircraft that received ATG-4 actually weren’t all upgrade aircrafts. So the comparison pre and post we’re not done with that analysis also planes don’t fly the same routes consistently. So we’re probably have to wait another quarter before we really come out on answering the customer behavior but from a technical point of view we are very confident in the performance of ATG-4.

Phil Cusick - JPMorgan

Got it. And then on the Business Aviation side as you said I don’t think it gets a lot of attention. Can you talk more about the competition here for voice and broadband? Thanks.

Michael Small

Yeah. So given the inherently smaller size of a business jet satellite, broadband solutions are not very applicable. They do exist few carriers few jet owners are quite locally have that installed but throughout of the United States nothing competes with our broadband solution. So we have the vast majority of all broadband installations and the U.S our Gogo’s for voice service it’s a little more competitive but we still because it’s our multiple technology solutions. The primary one being Iridium and but we still have significant maturity market share in that business based on the distribution network and the level of customer service we can provide.

Phil Cusick - JPMorgan

Thanks guys.

Michael Small

Thanks, Phil.

Operator

Your next question comes from the line of John Hodulik with UBS

John Hodulik - UBS

Hey thanks. Great quarter out of the gate guys.

Michael Small

Thanks, John.

John Hodulik - UBS

Two questions. First one follow-up to Phil’s question on the Business Aviation. You talked about larrying in the talk and test in 2013. Could you talk a little bit about what that’s going to provide you customers and whether we are going to see any sort of change and maybe ARPU in the numbers if that gets rolled out and then in the Commercial Aviation side you had a strong quarter of installs I think I remember seeing in that perspectives that you expected to install about a 170 by the end of the year from second quarter on I don’t know if that’s the right number but it’s actually just you are going to see somewhat of a slow down in the second half of new planes in the North American side.

Michael Small

Yes as currently scheduled that will be a significant reduction in the number of installs in the second half of the year versus the first half of the year we completed the U.S airways fleet and we are at an elevated level doing that. So you are right to expect a material decline in the number of installs in the second half of the year.

John Hodulik - UBS

So that 170 number is still holds I think it.

Michael Small

I’m not sure where you got the 170 number for a pipette effects.

Norm Smagley

The 170 is good well we likely come in a little better than that.

John Hodulik - UBS

Okay. Okay excellent.

Michael Small

Yeah so and John Business Aviation we expect to during the remainder of this year to announce several new products and services. One of well I guess two of which we referred to in the scripts, text and talk as well as the smartphone but there will be more we think that will be helpful not only to increase the average revenue for customer aircraft it will be helpful on a crafting additional operator aircraft owners to come to our service. So we are very excited and you should look forward to announce it’s during the remainder of this year.

Norm Smagley

I would expect since those come later in the year we expect to bigger financial bump to have in 2014 versus 2013.

John Hodulik - UBS

So did you guys charge more for that service on these Business Aviation that’s when you are able to provide them with the talk and test?

Norm Smagley

Yes.

John Hodulik - UBS

They see the all the plane seen automatic step up in prices once you guys turned that service on or is it a question of pay grades and who signed up for that service?

Norm Smagley

We have to elect a service and then the ARPU takes a bump up.

John Hodulik - UBS

Okay. Got you. Thanks guys.

Operator

Your next question comes from the line of Jonathan Schildkraut with Evercore Partners.

Jonathan Schildkraut - Evercore Partners

Great. Thanks. I appreciated the disclosure today and strategy and talking about more aircraft and then more services. Maybe you can give us a sense as to what your backlog is in terms of planes that are waiting to be installed both in the CA-NA and potentially the CA-ROW segments and then if we can get an update you talked a lot about the rollout of vision where are we in the beta trials in terms of seeing customer usage habits? Thanks.

Michael Small

So backlog and the Road Show we said we had about 400 and backlog and we’ve installed all about 100 so we have about 300 left in CA backlog. And now remind me of your additional questions.

Norm Smagley

The backlog in the rest of the world will be Delta?

Michael Small

Yeah Delta is the announced backlog in the rest of the world.

Norm Smagley

Which is roughly a 170 planes.

Jonathan Schildkraut - Evercore Partners

Thank you. And then usage habits on Gogo Vision and anything from the beta trials?

Michael Small

We have been running a relatively on advertised whether or not service principally on American Airlines today we actually just rolled out an new portal in the last month or so that makes Gogo Vision much more integrated into the offering it’s much easier to get from connectivity to Gogo Vision and that was one of the key challenges to solve. We think with their and we are selling enough of it now even on the on advertised on promoted basis to really have a good sense of performance. You wont see revenues are nominal at this stage. They are beginning to ramp phenomenal basis. There wont be material this year but we should have good insight by the end of this year on how much we can expect for 2014.

Jonathan Schildkraut - Evercore Partners

Great. If I can ask one more follow-up question in the release you talked about an increase in rev share with some of your partners and I was just wondering where we are in terms of the rev share and if there are any further step ups that we should be aware as we model out the company.

Norm Smagley

At this point we have essentially achieved almost all of the rev share triggers there is as you know is a big bump in average rev share during 2012 from FY’11 to 18% were about 20% now and then we could expect to see over the next couple of years maybe another two point increase but we are pretty much there at this point.

Jonathan Schildkraut - Evercore Partners

Thank you for taking the questions.

Michael Small

Thanks, Jonathan.

Operator

(Operator Instructions) Your next question comes from the line of James Breen with William Blair & Company.

James Breen - William Blair & Company

Thanks for taking the question. Just a couple of things. One is a follow-up to Jonathan’s question on the media side. Can you just talk about the sort of products that you are offering there and just thoughts around sort of how that pricing works and offering those products the actual type of media providing. And then on sort of longer term strategy outside of the U.S obviously you just talked about Delta having 170 planes in backlog there. Can you talk about how potentially the relationships with those carriers in the U.S can impact the amount of share that you can gain outside the U.S.? Thanks.

Michael Small

Okay. Sure. Hi, Jim. So, the media platform there is various types of transactions relationships we can have with partners the straight advertising, their sponsorship which means they underwrite the cost of some level of service for customers 15 minute, half hour session may be or free access to Facebook and by doing that engagement rate goes through the roof for the advertiser. There can also be ecommerce relationships where actually sell something in the skies and there can be lead generation also that happens from the sky.

Most of these are highly customized solutions which is one of the main attractions to advertisers and ecommerce partners so that they can do something different and so one of our frankly one of our challenges is how they to a, to the benefit of customization but still have a repeatable business model that we can really described to you. What is clear is we have a hot commodity here advertisers love this and I think we will be clear to you on how to build the business model over the coming quarters that’s still only $1.9 million in the quarter of non-connectivity revenue, we expect that to grow over time and by time means the material number I think will give you much more insight into your question.

Share internationally what I think is going to private mutually is that we know this business from an end-to-end operational point of view, every airline in the world is pretty well figured out three is going to be mission critical forum that have broadband connectivity to the planes and to have a partner that can reliably execute forum and not just lock in there with much power points is going to be very important. The fact that we did our IPO and are well capitalized airlines clearly one of the partner that’s going to be around for yeah well beyond a decade and we can check that fax now at a whole different level.

We also think our rate of the product innovation particularly at network technology is going to be critical for airlines around the world. this you can’t sell just one – one technology today and expect it to last for the life of an aircraft, aircraft live 40 years out technology cycle is 5 to10 and so there is going to be multiple upgrades on a plane and no one’s been in invest against developing technology in the space like Gogo.

James Breen - William Blair & Company

Great. Then just one follow-up on financials between the U.S. and the rest of world or North American rest of world. as you think about providing bandwidth over your ATG network relative to reselling satellite bandwidth through one of your partners, can you talk about sort of the mature margin profile on that here the margins significantly different from an EBITDA perspective based on the reselling versus running over your network? Thanks

Norm Smagley

Sure. Over the longer-term Jim, domestic capacity of the supplement didn’t provided by satellite as well. So when you look at the two businesses between North American rest of world over the longer-term we expect the similar margin profile between the businesses. Between satellite and ATG, it’s really a tradeoff between margin and CapEX in the near-term ATG is more affordable but we’re building the network so we’re spending the money there. In satellite the OpEx piece might be a little higher but we’re not really making the investment to build the network. So, from a cash flow perspective, they pretty much net out and over time as satellite gets – we expect satellite to be a less and less expensive it should really begin to approach what ATG is. For longer-term, I think the margin profile doesn’t really change.

Michael Small

Yeah and that Norm’s last point or next to last point (indiscernible) satellite today in our estimation is considerably more expensive than air-to-ground but over the course of the decade at least the bandwidth costs between satellite and air-to-ground will converge.

James Breen - William Blair & Company

Great. Thank you very much.

Norm Smagley

Sure.

Operator

(Operator Instructions) Your next question is a follow-up from Jonathan Schildkraut with Evercore.

Jonathan Schildkraut - Evercore Partners

Thanks. Norm. You talked a little bit about seasonality of revenue growth and in your prepared comments, so I was wondering if there was any seasonality on the cost side that we should be aware of. And then, separately we talked about increasing investment in the Rest of World segment as we come through the back part of the year. I was wondering if you could give us some visibility into how the cost there might scale?

Norm Smagley

Right. So, we’re really on half seasonality and operating expense doesn’t really fluctuate dramatically. In the second part, one of the primary things we have gone on in the national side we’ve turned on the global network for Ku satellite and those expenses will build through the year. We haven’t really disclosed anymore granular detail about that.

Michael Small

I will add one comment that we view total expansion as that have tremendous value creation opportunity and as we work through the issues to get global we’re going to be aggressive and we’re going to do what as takes that to solve the FAA concerns to make sure Ku solutions are working for airlines to continue to our discussions and partnership with Inmarsat and Global Xpress and continue to invest in proprietary solutions. We intend to win in the international arena.

Jonathan Schildkraut - Evercore Partners

You is it just in Inmarsat that you have relationship with or is that just for Ka-band or they providing also you Ku-band connectivity. And then separately as we look at rest of world, because it’s so early in the game and it is sort of developmental, are there kind of I don’t know metrics that we should be focused on to see that the progress on the company’s development? Thanks.

Michael Small

Yeah. So our partners are Inmarsat for Ka Global Xpress Solution just their proprietary global solution the first satellite will launch in this year and service should begin around the first of from 2015 and then we are currently partnered with SES and Intelsat for Ku satellite capacity. The metrics I focused on which I think driving and I will think you should be too as getting satellite planes flying mostly and signing contracts are the two metrics you should be looking for.

Jonathan Schildkraut - Evercore Partners

Alright. Thanks again for taking all the questions.

Michael Small

You’re welcome.

Norm Smagley

Sure.

Operator

(Operator Instructions) Your next question comes from the line of (Suresh Kumar Jetty) a Private Investor.

Unidentified Analyst

Hey, good morning. I have a quick question. What is the competitor edge of Gogo compared to other competitor suffix who has – who is providing higher bandwidth?

Michael Small

No one provides more bandwidth to more planes than Gogo. We’ve nearly 3700 broadband aircraft and 10,000 narrowband and medium band aircraft flying, which is orders, in the magnitude more than any other contender. It is our ability to always provide the most efficient, most powerful bandwidth to planes. It will be a differentiator for Gogo and our past operational experience relative to our competitors should really make a big difference to airlines those are two key assets and now that we’re well capitalized I think we could match anybody out there in that regard too.

Michael Small - President and Chief Executive Officer

Alright, it looks like we have no further questions. Thank you everybody. Thanks for participating in our first quarterly conference call. We look forward to many more. Have a great day.

Operator

Thank you. This concludes today’s conference. You may now disconnect.

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GoGo (GOGO): Q2 EPS of -$0.23 beats by $0.14. Revenue of $79.4M beats by $6.22M. (PR)