Gogo's (GOGO) CEO Michael Small on Q1 2014 Results - Earnings Call Transcript

| About: Gogo (GOGO)


Q1 2014 Results Earnings Conference Call

May 12, 2014; 08:30 a.m. ET


Michael Small - President & Chief Executive Officer

Norm Smagley - Executive Vice President & Chief Financial Officer

Varvara Alva - Vice President of Investor Relations


Philip Cusick - J.P. Morgan

John Hodulik - UBS

James Breen - William Blair

J Schildkraut - Evercore

Carter Mansbach - Jupiter Wealth Strategies


Good day ladies and gentlemen, and welcome to the Gogo Inc., first quarter 2014 earnings conference call.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

And I’ll introduce your host for today’s conference, Varvara Alva, Vice President of Investor Relations. You may begin.

Varvara Alva

Thank you, Ashley. Good morning everyone and welcome to Gogo’s first quarter 2014 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 this 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 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 and our more fully detailed under the caption Risk Factors in our 10-K, which we filed with the SEC on March 14, 2014.

In addition, please note that the date of this conference call is Mary 12, 2014. 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’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 Gogo’s website at www.ir.gogoair.com and the earnings release is also available on our website. After management’s remarks, we will host the Q&A session.

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

Michael Small

Thanks Varvara. Welcome the Gogo’s first quarter earnings call. Q1 was a great quarter. Throughout the quarter we were focused on three main goals: First, sing new Aircraft; second, create more and lower cost bandwidth; and third, continue to hit our numbers. Here’s how we stacked up against those goals.

In terms of new aircraft, in April we announced a deal with Air Canada for 130 aircrafts. This increases our already significant lead in North America. In terms of increasing bandwidth and lowering its cost, we unveiled 2Ku and continued to rapidly rollout ATG in North America.

Our third and final goal was to continue to hit our numbers. I’m happy to announce that we reported continued strong financial results and saw both CA North America and BA segments demonstrate significant operating leverages year-over-year.

In addition to hitting these goals, we also announced the major milestone announcements for our business. We launched connectivity service on Delta’s international fleet and received additional certifications from the FAA to install our satellite equipment. And in April, we announced our technical service agreement with Boeing. This agreement enables us to pursue lines and installation of our ATG-4 and satellite solutions.

I’d like to now provide a little more color on each of our achievements starting with the financials. We reported record quarterly revenue of $95.7 million and adjusted-EBITDA of $5.3 million. We accomplished this despite the nearly $17 million investment we made in our international expansion for the quarter. Both CA North American and BA delivered record revenue and profitability, demonstrating strong operating leverage.

CA North American had $57.1 million in revenue, up 32% from the prior year. Average annual revenue per aircraft or ARPA was over $110,000 per aircraft annualized up 20% from the same period last year and the segment profit increased to $5.8 million. Performance in this segment was driven by strong revenue growth and reductions in both cost of service and other operating expenses as a percent of revenue versus a year ago.

Switching over to BA, our BA segment continued to post exceptional results. Revenues hit $38.6 million for the quarter, up 47% year-over-year. The segment profit was $16.5 million, up 74% versus the year ago. I think this is a great financial quarter for Gogo. Norm will get into more financial details a bit later on the call.

Now I’d like to switch gears and talk about our achievements and increasing bandwidth to aircraft, including our recently announced 2Ku technology. The most important things you need to know about 2Ku are that is revolutionizes connectivity for the global aviation industry and its exclusive to Gogo.

We firmly believe 2Ku gives us a competitive edge. When it comes to international aircraft, 2Ku is the fastest solution in the market, offers the lowest cost to bandwidth, has the best coverage and offers significant operational advantages for airlines.

When I say fast, the 2Ku antenna is expected to deliver peak speeds of 70 mbps per second to the aircraft initially; it’s the highest in the industry. Such speed is expected to increase to over 100 mbps per second when newer spot beam Ku satellites are launched. The antenna is two times more especially efficient than other antennas. This ultimately means cheaper bandwidth. It’s also the most efficient way to deliver broadcast and IPTV.

In terms of coverage, the unique, only Gogo has it, circular shape of the antenna eliminates the ski length of problem that exists today with traditional satellite based connectivity systems in tropical regions.

So what does it mean? It means passengers on the plans flying, for example from London to Sydney or Atlanta to Sao Paulo won’t suffer up to three hours of degraded service when the aircraft is flying over tropical regions.

Operationally, we expect the low profile of the antenna to save an airline approximately $25,000 of fuel burn on a typical aircraft per year. I said it before; I see 2Ku as a game changes for the industry that opens a range of possibilities in how we can serve our airline partners.

I want to make one thing clear; GTO and 2Ku are essentially the same technology. We purposely engineered GTO to leverage our ATG network; therefore our GTO will only work over North American. We designed 2Ku to work anywhere, including over water. So any aircraft, whether international or North American flying over water, are great candidates for this technology.

GTO will offer the same benefits as 2Ku, namely superior speed and efficiency. However, the equipment will cost modestly less and weigh less, which will save on fuel burn. Performance wise, these technologies are very similar. Development of both technologies remains on schedule. While 2Ku and GTO are right around the corner, ATG-4 is here now and I’m extremely excited about its performance.

At the end of Q1 we had nearly 2,100 commercial aircrafts in North American. 534 of those had ATG-4. During the quarter we updated close to 100 aircrafts to ATG-4. We are well on our way to hitting our goal of 800 by the end of the year.

As you know ATG-4 triples the peak speed to the aircraft to 10 mbps. This performance upgrade has greatly relieved capacity constrains on our busiest flights and our internal analysis shows that its been a real benefit to customers.

When compared to ATG, ATG-4 had significantly lower average licensee fee, higher customer satisfaction scores and lower customer care chat rates. Also early indications point to increased take rates. As a result, Virgin America, which is now almost full fleet with ATG-4 has concluded they have more time to adopt next generation capacity enhancements as a result of this strong performance of ATG-4.

Now I want to add one more detail on our airline wins and instillations of new aircrafts. We are extremely excited that Air Canada awarded their entire domestic fleet of 130 aircrafts to us. As you know, they also have announced files of both 2Ku and Global Xpress connectivity technology on their international aircrafts. We expect those trials to start in 2015.

In March, we launched connectivity service on five of Delta’s 180 international aircrafts. In addition to Delta, Japan Airlines instillations are also under way. As you might have seen, last week we announced the certification for the Boeing 777-300 aircraft and now have four different aircraft type certifications to install our Ku-band in-flight connectivity system, including a 747-400, 777-200 and 777-300 Boeing aircraft and an A330 Airbus aircraft. We are on target to meet our goal of having 50 to 100 aircrafts lying outside of North America by the end of 2014.

To wrap-up, I am very pleased with our results and achievements to-date. We bring industry leading and mission critical communications infrastructure and services to global aviation, adding GTO and 2Ku to our technology portfolio, which also includes Global Xpress, Ku, ATG-4, ATG, Swiftbroadband and Iridium materially strengthens our position in competing for global aircrafts.

Whether developed internally or in conjunction with our partners, Inmarsat, Qualcomm, ZTA, Cisco, Honeywell, Intelsat, STS and others, we have proven our leadership in bringing more bandwidth at lower cost to any aircraft type no matter where it flies. Our industry-leading portfolio of technology solutions continues to be a driver for growth and a competitive differentiator.

In addition, Gogo has uniquely positioned itself as an aircraft communication service provider offering complete end-to-end and highly reliable solutions to the global aviation industry. That is why we expect to continue to increase our aircraft talent and revenue per aircraft.

To-date 8,300 of approximately 4,000 total addressable global, commercial and business aircrafts at Gogo services. We believe the rapidly improving connectivity, cost and performance, combined with the competitive pressure from the initial IFC deployments outside of North America will prompt more airlines to select IFC providers sooner rather than later. We are well positioned to increase our share.

We have the relevant scale in this industry to succeed. We are the pioneer and leader and we will focus on continuing to execute our plan, which will keep us out in the front of any existing or potential new competitor. Big companies entered this business in the past and failed. We are a tough competitor to unseat and I am excited about our long-term prospects.

Let me know turn this over to Norm to take you through the numbers.

Norm Smagley

Thanks Michael. Good morning everyone and thanks for joining us. As Michael mentioned, we had a great quarter. We saw significant strength in the operating performance of both our CA North America and Business Aviation segments and we’re very pleased with the growth trends in these businesses.

We achieved record revenue of $95.7 million for the quarter, up 35% versus the first quarter of last year. Our service revenue of $72.3 million was up 32% and our equipment revenue of $23.4 million was up 48% versus last year. Our adjusted EBITDA of $5.3 million was up 87% versus the first quarter of last year despite a $10.7 million increase in our CA Rest of the World segment loss to $16.9 million in this quarter.

Now lets talk about our operating segments starting with CA North America. Revenue of $57.1 million was up 32% versus last year, driven by a 31% increase in connectivity revenue. We ended the quarter with 2,056 aircrafts online, up 9% in the same period last year.

Our average monthly service revenue per aircraft or ARPA reached nearly $9,200 a month, up 20% from last year. This indicates an annual revenue of just over $170,000. ARPA growth was driven primarily by an 11% increase in take rate to 6.9% and an increase in average revenue per session of $0.25 to $10.55.

For the quarter CA North America cost of service declined to 48% in service revenue. This represents an improvement of over three percentage points versus last year, driven by the inherent scalability of our infrastructure.

In addition, other operating expenses excluding depreciation and amortization as a percent of revenue declined 10 percentage points, primarily driven by G&A and engineering design and development. G&A increased marginally in absolute terms year-over-year driven by headcount increases to support business growth and higher public company expenses.

ED&D declined marginally in absolute terms of the year-over-year basis, driven by the timing of costs incurred in connection with STCs, the development of our next generation products and technologies and increased focus on CA Rest of World development activities.

Our CA North America segment profit of $5.8 million for the quarter was up $6.2 million from a segment loss of $0.4 million a year ago, an improvement of 11% in segment profit margin.

We expect our year-over-year performance for the upcoming quarters to fluctuate from the first quarter due to variability and the timing of operating expenses like technology development, milestone and STCs. We do expect overall operating expenses to decline as a percentage of revenue versus the prior year, demonstrating continued improvement in operating leverage in the business.

I would like to take a moment to discuss the segment profit trends we are seeing in North America. In 2011 to 2013 segment profit improved by 29 percentage points, despite a significant increase in rev share percentage paid to airlines as expected for the terms of our zero cap airline contract and increases in engineering and G&A, to enable us to development support in multiple technologies and to become a public company. This clearly demonstrates the operating leverage and inherent profitability of the business model.

Lets now turn to BA. As Michael mentioned, BA had another record quarter. Revenue was $38.6 million. It was up 47% versus the first quarter of last year. Service revenue was up 44% and equipment revenue was up 49%. During the first quarter we continue to see strong demand for our ATG broadband service. We shipped 241 ATG systems and the number of ATG aircraft online increased to 2,250.

We also sold an addition 272 Text & Talk units during the quarter, leaving the total to 824 since our product introduction in September 2013. Given the high initial sales of Text & Talk, we do expect the continued sales pace to be somewhat lower. Text & Talk is truly a transformative new product to the business aviation cabin as our customers can now send and receive phone calls and text messages, while in flight, using their own phone. We sold 153 satellite-based systems, ended the quarter with nearly 5,300 satellites-equipped to aircraft online.

BA segment profit increased 47% to $16.5 million, driving segment profit margin from 36% to 43%, as equipment cost of goods sold decreased from 49% of revenue to 40%. This improvement was driven by the product mix and sales of Text & Talk.

At the end of quarter we also turned up Airfone service, as part of the plan we announced last year to integrate Airfone customers into our existing suite of products and services. As a result, we expect to see further declines in our cost of services as a percent of service revenue, as expenses to decommission the old Airfone network will be recorded as other operating expense. We expect to complete the shutdown of the Airfone network by the end of this year.

Finally, lets discuss CA Rest of World, which as you know carries the cost of our global satellite network and other operating expenses has no meaningful revenue. Partially we launched service on Delta International aircraft and finished the quarter with five aircrafts online.

For the quarter we generated just over 100,000 of revenue and segment launched increased the $16.9 million, up $10.7 million versus last year. The increase in segment loss was driven by a $1.2 million reduction in non-recurring revenue, a $6.3 million increase in cost of service, due primary to increased satellite transponder and teleport fees as we also incurred $3.2 million of increase in other operating expenses, due primarily to increased development and certification expenses for our satellite connectivity systems. We expect our operating expenses to fluctuate on a quarter-to-quarter basis, primarily due to the timing of SEC announcements for next generation technology development milestones.

On a consolidated basis our adjusted EBITDA increased to $5.3 million for the quarter, driven by a $6.2 million increase in CA North American segment profit, and $7 million increase in BA incentive profit, partially offset by $10.7 million increase in CA Rest of the World segment loss.

As you recall, we previously provided our adjusted EBITDA guidance for the year of $8 million to $18 million. Given the expected quarter-to-quarter variability of our technology and development and STC certification milestones and both CA North American and CA Rest of the World, we leave our guidance for the year unchanged.

Net loss attributable to common stock decreased to $16.9 million for the quarter from $0.20 per share, which is a $32.5 million net loss attributable to common stock, from a $4.70 per share loss in the first quarter of last year.

Cash, capital and expenditures increased to $28.6 million for the quarter, up slightly from the $27.1 million for the first quarter last year, as a result of investments in our ATG network primarily in Canada and the timing of receiving airborne lease incentive payments.

I’d like to discuss our free cash flow for the quarter. Its important to understand the timing of certain working capital items that impact our cash. For the quarter free cash flow, which we define as the sum of net cash used in operating and investment activities was a negative $45.4 million, a decrease of $11.7 million from the negative $33.7 million for the first quarter of last year and a decrease of $28.4 million from the negative $17 million from the fourth quarter of 2013.

Compared to the first quarter of last year, most of the decrease is due to higher payroll and bonus related payments, which are paid in the first quarter of each year. This is the fourth quarter of 2013. The decrease was driven by the payment of annual bonuses, as well as differences in the timing of the payments, particularly the satellite capacity and airborne equipment.

As we ship equipment to the airlines for installation, we will receive payment for the equipment. Overall, the average of the cash used in the fourth quarter of 2013 and the fist quarter of 2014 is much more indicative of the rate of cash we expect to use this year. We ended the quarter with nearly $207 million of cash on the balance sheet.

To wrap up, I’m extremely pleased with our operating and financial results for the quarter. Operator, we are now ready to take our first question.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from Philip Cusick of J.P. Morgan. Your line is open.

Philip Cusick - J.P. Morgan

Hey, it’s Phil Cusick from J.P. Morgan. So I guess we’ll start with the big topic that people are focused on. There’s been a lot of talk about competition lately. Can you talk about the competitive environment for RFPs internationally and can you also address your view of AT&T’s announcement a couple of weeks ago. What are the risks to your business for that? Thank you.

Michael Small

Okay thanks, good morning. I’ll address the second half. First, the AT&T-ish and I think the simple answer is our next generation solutions; both GTO and 2Ku will be faster and will be flying sooner than AT&T’s proposed solutions.

We keep seeing competitors talking about what they will do tomorrow and comparing it to what we did yesterday and that’s an erroneous comparison. Gogo repeatedly keeps winning to-date versus today’s comparisons and that’s why we have our 8,000 plus aircrafts between BA and CA and the bottom line is we are the company with the shiny new products and we intend to keep it that way.

I’d also say the more nuance issue is that because we have the most aircrafts, we are able to and do invest the most, not only in new technology, but in making what we have run better and I would say that the market is often – it doesn’t see our prowess and running airborne networks, because yes, our networks are congested today, but I would say what telecommunications network hasn’t been congested in the early explosive pro-stage of the industry, where they ask AT&T about their Manhattan experience after the introduction of the iPhone and its literally littered with the – the history of the industry is littered with similar examples.

So what really matters is getting the best network solutions to the market faster and at lower costs than the competition and then running them better and that’s been the basis for our success so far and I believe that’s why we’re going to continue to win, regardless of who tries to enter the market.

There is no doubt that people see the attraction of connecting aircrafts. I don’t think there’s a – I get drawn to a person who disagrees with that vision of the future that all aircrafts will be connected. We are seeing competition, but we are winning our share. We’ve been announcing a major new airline every quarter with a significant sized fleet. We keep doing that and Gogo is going to be in very good shape.

Philip Cusick - J.P. Morgan

And speaking of that, can you talk about the competitive environment for RFPs internationally? Do you still feel good about announcing a couple of more airline deals this year?

Michael Small

Yes, we’re highly confident we’ll announce additional meaningful new contracts this year.

Philip Cusick - J.P. Morgan

Thanks Michael.


Thank you. Our next question comes from John Hodulik of UBS. Your line is opened.

John Hodulik - UBS

Okay, thanks guys. Just some more information on the whole Boeing line-fit process. I mean, how big is this for the company and how long would it take to get line-fit and maybe are there any other milestones we should look for. Thanks.

Michael Small

So line-fit in the long run is critical. In the short run its more a nice to have and an average aircraft lasts 30 to 40 years. So if you want to make a rapid entry into our business, you have to retrofit the installed base. There’s just not enough annual new deliveries.

Flip it around, in the long run every new aircraft was new at it some point in time. So when you enter an avionic space business, initially your business is retrofit and over time it becomes line-fit. It is this long and involved process, because it’s a complex process to engineer an aircraft and to conform with all the requirements. We are well down that path with Boeing. We’ve gotten all the paperwork out of the way. It’s now down to the engineering.

You will start seeing that being relevant in the near term for our ATG, our ability to line-fit, that’s going to happen quicker, but satellite will be a year plus out, and again as I said, its important to us to solve that problem for the long run, but its not the immediate issue as far as getting aircrafts installed.

John Hodulik - UBS

Okay. All right, thanks Michael.


Thank you. Our next question comes from James Breen of William Blair. Your line is open.

James Breen – William Blair

Thanks for taking my questions. Can you just talk about the margin side? It seems like you had pretty good leverage on the cost side this quarter. EBITDA margins were up quite a bit. How do you expect that to trend at both the EBITDA and gross margin line? Thanks.

Norm Smagley

So the rest of this year you will see variability in that segment profit margin, both in CA North America in particular, a lot of it is based on the timing of getting STCs and hitting other development milestones. But we won’t see an overall improvement in operating leverage this year versus last year, but quarter-to-quarter there will be variability.

James Breen – William Blair

Great. What are some of the factors in terms of how that is variable on a quarterly basis, the installs in the planes equipment revenue?

Norm Smagley

No, it’s not really that. It’s more a factor on the spending side. For STCs for example we recognize the expenses as certain development milestones are hit. Also on other technologies, antenna development or what have you, software development, we don’t recognize the expenses when milestones are hit. The timing of those milestones are not consistent quarter-to-quarter. Those are the kind of things that drive the variability primarily.

James Breen – William Blair

Okay, and then just on the satellite side, as your launching some of these services in the back half of this year, can you talk about the costs that you have in place now in terms of transponder space and is that going to have to increase over the next couple of years as you launch more planes with your new solutions.

Norm Smagley

Yes, this year or next year we don’t really see any significant increases. Potentially in ’16 we may have to take on some more, but it would be incremental. It would be marginal and incremental; it wouldn’t be significant increases.

Michael Small

Yes. So just to add some color, we have a Global Ku network in place at the end of the first quarter. As we just described there were five planes flying on that. So we obviously have a tremendous opportunity to leverage what’s happening. Very little additional coverage is required and over time as the number of aircraft increase in some locations, we will have to add additional capacity, but we basically have paid for the fixed cost of the coverage and going forward it will be driven by capacity, but we have a tremendous amount of unutilized capacity now. So a high percentage of the revenue growth will drop to the bottom line as we start to see the ramp internationally.

James Breen – William Blair

And then just lastly on the CapEx, the number was up quite a bit for the fourth quarter. How do you see that moving throughout the year?

Norm Smagley

Again, that’s timing. Right now we’re building inventory to the Delta (inaudible) and so when we purchase the equipment it counts as CapEx. If you look at net cash CapEx later on, when we get to the reimbursement front as it’s installed, you’ll see the offset.

James Breen – William Blair

Great, thank you.

Michael Small

So we kept the guidance on CapEx.

Norm Smagley


James Breen – William Blair

Great, thanks.


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

Unidentified Participant

Good morning. This is (inaudible) for Simon, thanks for taking the question. I just wanted to get an update on where you are with AeroMexico and Air Canada in terms of finalizing those contracts and also wondering about the international take rates now that you have five aircrafts in the air. And lastly, just an update on GTO timing and any conversations you’re having with airlines around that. Thank you.

Michael Small

So we continue to make good progress on negotiating final definitive agreements with both Mexico and Air Canada. I think they are moving along faster than typical. So it’s a process, but we are also actively working on the implementation plan, the installation plan, on parallel with it. Its very similar to the process we’ve done with the other airlines, except probably on a somewhat more expedited basis and it has been typical.

The side planes, way too early to disclose results. I’m not even sure that we will be in a position to give you a lot of data even at the end of the next quarter, but during the course of the year we will continue to get more and more data and begin to provide it.

And then finally the last, GTO remains on schedule. As I mentioned in the prepared remarks, they push out one way trial with Virgin America, because basically they are seeing the tremendous performance of the ATG-4, the complaints including on flights with more than 50 users have all but dried from their perspective and so before they added something more to their aircraft you take a little more time, but I am highly confident we have GTO flying on a plane this year. The development of that is on track in the performance we’re seeing in the lab and on the ground and by the way, if those work in the lab and on the grounds, it is very good.

Unidentified Participant

Thank you.


Thank you. Our next question comes from J Schildkraut of Evercore. Your line is open.

J Schildkraut - Evercore

Great, good morning. A couple of questions here. First you know, if you could talk to us a little bit about what’s going on with Spectrum for air-to-ground. We understand that you’re using three megahertz a spectrum to deliver an EVDO product. You have one megahertz spectrum that sort of is waiting to potentially be imployed. What’s your perspective on that?

And then maybe give us a broader view on ETG spectrum in general. I know that you guys have the ability to offer LTE, but your constrained by the fact that you don’t have the spectrum in which to deliver LTE and the government has looked at 14 gig as potentially off shouting some of that for air-to-ground’s usage. How do you feel about that auction versus say the government reallocating other spectrum for usage for air-to-ground and then I’ll follow up with a different question? Thanks.

Michael Small

So yes, spectrum is valuable and our three-megahertz is what revolutionized connectivity in North America’s aircraft and everybody would like more. I would say that the value of spectrum on the grounds is higher than in the air, just due to the – that there’s 300 million people that use cell phones on the grounds and there’s maybe 20,000 aircrafts between BA and CA in the U.S. So you’re unlikely to see spectrum taken away from the grounds for the air.

There’s right now we have the only spectrum that is clearly authorized for air-to-ground. I do suspect people are going to search hard as we have been, for ways to bring additional spectrums there. I would also comment that as far as spectral efficiency, our EVDO Rev V is as good as LTE, to be able to offer broader channels. We’re right now using 1.5 megahertz of the guard bands channels in each direction. If you can make those five or 10, you can increase the speed to the aircraft.

I do not see a terrestrial solution that is going to match our speeds of GTO or 2Ku at 70 mbps growing to 100. I also know that the satellite clearly work over water to expand the coverage and will be better for a TV solution.

The air-to-grounds is often better for the smaller aircraft and never fly over water and lower cost lower drag. So there will be a trade off. I do not see an air-to-ground solution really beating our 10 megabits per second, our ATG floor by a whole lot.

J Schildkraut - Evercore

Great. Thanks Michael. If I can also ask a question about customer satisfaction, sort of measuring that and maybe there are kind of different levels of measuring customer satisfaction. You talked about with Virgin, the planes at ATG-4 sort of seeing complaints drop to zero, but you know customer SAT, it occurs and lives at the end user level, the guy or lady who jumps on the plane, but it also occurs at the carrier level, the airline level and maybe if you can give us some color and I don’t know how you think about it or how you measure that or if there’s a net promoter score. But I think some insight into the relationships you have with the end user customers and with the carrier customers might be helpful as we think about the competitive landscape.

Michael Small

We do measure both, the customer satisfaction, as well as airline partner satisfaction and they don’t always necessarily go unparallel. So you got first the passenger. There is a couple of different ways to look at it. Some people for business purposes say, I just now reclaimed several hours of my travel experience to actually get some work done. This is best thing that’s ever happened to me. Its worth any price they could pay for and I just wanted to start on that to even be particularly fast as long as the emails go through. They absolutely love our service and buffet, anything for it.

And there is the consumer who is getting increasingly video intensive and kind of expects WiFi to be free and they are not there yet on our service. So you have bi-model distribution there. Try to be very clear about what it does and doesn’t do on the planes and so ATG-4 really solved the problem for the hardcore business travelers, because now with reliable no matter how many people are on the plane, that’s what they want it to do and we’ve seen that loud and clear in our field.

The airlines also in addition to wanting their passengers to be happy, they want it to work everyday, every flight and they measure the planes taking off working with them. We’re getting to extraordinary levels of reliability and a few number of dropped calls. When you really think about it, it is a cellular link to a plane. We’re actually outperforming by experience on the ground. We have a more reliable system in the air to maintain that link and we are getting better everyday at doing that.

We fly over 7,500 flights every single day. We measure against that reasonably sizable universe. I don’t even think any of our competitors have the ability to begin to measure it. They don’t have planes flying, enough flights to-date to really get their arms around it. Across that measure Gogo does exceptionally well; the ability to make its network work everyday on every flight.

J Schildkraut - Evercore

That’s great. And if I could sneak one more question in here, could we get the updated statistics around Gogo Vision, planes installed or up and operating. And then if there’s any early color in terms of what your seeing from a demand or an economics perspective, that would be helpful. Thank you very much.

Michael Small

Sure. Quickly on Gogo Vision, there’s now a lot of planes that are equipped. It’s about – we said, well north of 1,000. It’s about 1,400 planes equipped right now. We are working across both IOS and android. We’re working across a wide range of device types. It still is not a significant revenue stream for us, because we invested a lot to make sure it works everyday on every plane across a wide variety of devices and operating systems and browsers. I think you will see that becoming an increased revenue stream even later this year and certainly next year, but say it has been relatively modest.

J Schildkraut - Evercore

Thank you for taking the questions.

Michael Small



(Operator Instructions) Our next question comes from Carter Mansbach of Jupiter Wealth Strategies. Your line is open.

Carter Mansbach - Jupiter Wealth Strategies

Good morning gentlemen. Congratulations on a great quarter.

Michael Small

Hi Carter.

Carter Mansbach - Jupiter Wealth Strategies

Good morning. I have two questions for you. First of all, in the way of marketing on commercial airlines, when I go to websites and look at all the different airlines, the only one that has in-flight on the front page is Virgin and I’m wondering if you have any kind of communication, sort of as a marketing campaign by the airlines to put out more information when the investor or the person going on the plane actually looks at it and perhaps as texting rolls out, there will be more out to do things.

Now the second thing is, I don’t believe it, this AT&T point, but I’m not sure the shareholders are aware that Michael in your past life you were CEO of Centennial Communications, which was taken over by AT&T at a 200% profit and having some communication with them in the past, I’m curious to know two things. One is, why they would announce something when they are not coming out with it for 18 months and the second thing, if you could talk a little further to us understanding the barrier of entry for a company being FAASCC and the like. Thank you.

Michael Small

So we’ll do the second one first. It is a long process to get into the business. There will have to be some FCC approvals to make sure. I mean, we don’t have a specific shift, but it is not obvious that the spectrum is clean and ready to go, so we’ll have to find that out.

There’s also a lot of intellectual property in the industry around building air ground systems that will have to navigate. They will have to get all the equipment certified by the FAA and then specific installations for that equipment on specific aircraft approved.

You got to build the nationwide network, the nationwide network that they have for the ground will not be very useful for the air. Some specific examples are, you need to be able to see over 100 miles in every direction on a cell site. So its almost got to be on a mountain top, which is usually not where you put them for the ground network.

If it’s going to be a high-speed network, it will need fiber to all the cell sites, we have fiber eventually on our cell sites and I guarantee that all cell site don’t have fiber to them. They are generally 2G cell sites on the ground. So there’s a lot of work to get all the way there.

What they have on the ground will not be highly useful for the aero market. There is a lot of specialized knowledge to get into this business. So that’s probably why – I mean you almost have to announce it well in advance, because it takes a long time. In my view everything would have to be perfect to hit the – as soon as the end of next year. Its not impossible, but it’s the happy path.

Then the first half of your question on the marketing I have to be very blunt. Spelling the service is not the challenging part. It’s getting enough capacity to the aircraft, so we have been focusing on maximizing the revenue and the capacity we have and maximizing the performance and the customer satisfaction from the capacity we have.

As we keep introducing more capacity, we’ll allow revenue to keep growing and we see that very clearly with ATG-4. It has also been the history of wireless when we first started with analog wireless in the late 80’s and early 90’s. We were struggling for capacity and you could only do 30 users per cell site and then the first generation of digital came along and we struggled to get any data rate out at all and it was a useless service for the longest time. So it has always been in wireless and really all telecommunications. Even remember how excited you were for the 56K modem on the Internet at one point.

Why anybody thinks it’s any different in this scenario than it has ever been in any other scenarios? So its really getting more capacity to a plane and making it easier to use and building better products that drives the growth and to me the harder our argument is to figure out why there won’t be 100% penetration. All the planes have connectivity and all the passengers and the crew and all the components of the plane will benefit by connectivity over time.

I listened to all the arguments on why wireless would only be 1% penetration on the ground and why it would never get above 20% and now it’s by 100% of people and there’s 50 billion devices around the world to get connected.

So the demand is there. Its also inevitable and what has to be dramatically different than it’s been on the ground, which I can’t think of a reason why. In fact I only know that the aircraft is more expensive than most of the things in the world and I know that the passengers on a plane are far higher demographics of the average person in the world. So demand is not our problem.

Carter Mansbach - Jupiter Wealth Strategies

So lastly, you guys expect to be rolling out texting second half of the year still?

Michael Small

Correct, it’s actually in beta commercial now. We tool a subset of our monthly subscribers and tried it with them and as Norm described, it’s performing very well in business aviation.

Carter Mansbach - Jupiter Wealth Strategies

Well, again thanks for your time and congratulations on a great quarter.

Norm Smagley

Carter, well I had two points. In terms of the marketing and the airlines reaching out to the passengers, one thing to realize is the airlines are beginning to immigrate purchase of WiFi and the purchase path when you have on the website to buy a ticket. So if you go on Delta right now, if you buy a ticket before you consummate the transaction, you’ll be asked if you want to buy a WiFi session for that flight. American is also working on that. I’m not sure that’s launches yet, but they are also in line to do the same thing.

And secondly, though they may not have it on the front page of their website, many of their advertising campaigns are focused on their WiFi as airlines use that one against each other for competitive positioning. So they are using it and relying on it in a variety of ways.

Michael Small

All right, next question please.


Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to Michael Small for any further remarks.

Michael Small

All right, thank you very much. It was a tremendous quarter for Gogo. We’re building a great business and we’re impressed with the revenue growth and also thrilled that our capacity solutions keep getting better. The ATG-4 feedback is very positive and adding Air Canada to our growing list of international airlines, we’re very pleased to do that.

So thank you, and we look forward to talking to you post this call.


Thank you ladies and gentlemen. Thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!