Gogo Inc (GOGO) 2013 Q2 法說會逐字稿

Good morning. My name is Stephanie, and I will 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 the mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thank you, Jennifer. Good morning everyone, and welcome to Gogo's 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 actual results to differ materially from those in the forward-looking statements on the conference call. These risk factors are describe in our press release, and are more fully detailed under the caption Risk Factors, and our final prospectus that we filed 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 will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is including in today's earnings press release. This call is being broadcast on the internet, and 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 a Q&A session. Now I'd like to turn the call over to Michael.

Thank you, Varvara. I'd 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 21. I'd like to welcome our new shareholders. I also want to thank our employees who are the driving force behind Gogo's success. More than 20 years ago, Gogo started with a vision of bring affordable mobile communications 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, a technology and service that is transforming the aviation industry. This month, we also celebrate the fifth anniversary of the launch of our broadband inflight connectivity service for commercial aviation on American Airlines. In the last five years, we've managed to expand that service to nearly 2,000 commercial aircraft across nine major airlines.

Now, to our financials. I am 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 2,000 commercial aircraft across 9 major North American airlines, we have more than 5,100 satellite aircraft and nearly 1,700 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 the 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 that use our connectivity service. We will also continue to expand the range of services we provide by offering inflight entertain and other in-cabin services to passengers, crew, and 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 will 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 2,000. At the same time, our take rate grew to 5.9% from 5.3% in the same quarter last year. We believe the 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 plentiful 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 road map are cell site additions; fiber optic, back haul deployment; and the rollout of our next generation technology, ATG-4. At the end of the quarter, we had 312 aircraft installed with ATG-4 and expect more than 500 by the end of the year. I am pleased with the performance metrics we are 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 sessions over the next several quarters.

Finally, we continue to invest in a robust technology road map for longer term capacity enhancements. I am also happy to report that our network expansion in Canada is going as plans. Last year, we received a subordinate license for the spectrum located in the same band as our US spectrum. We expect to activate our Canadian build out by the first half of 2014, which will enable us to provide service to Canadian-based airlines. It will also allow us to expand coverage for our US-based airline partners and business aviation customers flying over Canada.

I would like to give you a quick update on where we are with other inflight offerings beyond connectivity. Our Gogo Vision product is currently installed on more than 1,000 aircraft. We expect to achieve about 1,500 installations and product commercialization by the end of 2013. This makes us the largest provider of wireless inflight entertainment solutions in the world. Compared with embedded inflight 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 inflight text messaging service is also in development, and we are excited about its prospects. We expect to be able to offer the service to our business aviation customers later this year and to our commercial aviation partners and passengers in 2014. This product will contribute significantly to our objective of engaging all passengers with connectivity-enabled services.

Finally, let's not forget about our inflight multimedia platform. This platform continues to be in high demand by advertisers and e-commerce partners. Through our cutting-edge multimedia platform, we provide advertise and e-commerce 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 sells certain Chromebook devices with 12 Gogo selections included. Our partnership with Google has been tremendously successful. Nonconnectivity revenue, though 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 FCC to install up to 1,000 KU-based antenna systems. As of June 30, we have 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 [radom] installation. The FAA has increased its scrutiny industry-wide of radom installations to ensure continued safety of the aircraft. Gogo has been playing a leading roll 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 forecast this rest-of-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 US, 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 agreements 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 30, we reported close to 1,700 Gogo Biz aircraft online, and more than 5,100 satellite aircraft online. There are approximately 12,000 business jet in the US, and 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 Airphone acquisition. Airphone operates an air-to-ground network over 1 Megahertz of spectrum. They provide low bandwidth telecommunication services to approximately 1,000 customers. We publicly announced our plans to shut down the Airphone network by the end of 2013, and convert Airphone 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 spectrum, which will be available once the migration of Airphone customers is complete.

In conclusion, I am 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 the number of aircraft online, and to increase revenue per aircraft. We are tracking well on ATG-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?

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 was driven by a 54% increase in CA North America service revenue to $49.3 million, and by 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 to almost 2,000, up from 1,565 a year ago. ARPP increased 31% to $0.64, versus $0.49 last year, due to increases in the connectivity take rate and average per session, or ARPS.

The connectivity take rate increased to 5.9% versus 5.3% last year, as our expanded 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 toward the end of last year, we changed the retail pricing methodology of our Gogo connectivity service from simple [flight lanes] based pricing to more sophisticated demand-based pricing. Our take rate of 5.9% increased 0.6% versus the prior year, and represented a sequential decline from the 6.2% take rate we reported in the first quarter, due to seasonality. Seasonality in our business was driven by the change in passenger mix between business and leisure travelers that occurs in summer months and holiday periods. Since a higher portion of our users are business travelers, a change in the business/leisure traveler mix will affect take rate and therefore ARPP. Generally speaking, our second and third quarters are the most impacted by seasonality, and the smallest sequential revenue change occurs from the second to 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 a better visibility into how we are executing against this strategy, we are introducing a new metric that we call Average Quarterly Service Revenue Per Aircraft Online, or ARPA, A-R-P-A. In the second quarter of this year, ARPA increased 22% from the prior year to $25,600 this year. Net increase in total service revenue driven 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 1,684 versus 1,166 a year ago. BA service revenue also included $0.7 million associated with Airphone service to 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 a $0.3 million decrease from CA rest-of-world, offset in part by $0.1 million increase in BA.

Let me remind you our CA North America and rest-of-the-world segment generally do not record equipment revenue, even if we receive payment from the airlines. 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, 1 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 rate share and increases in network operations expense, [built-in] transaction-related expenses.

BA cost of services increased to $3.7 million, versus $1.9 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 in October 2012. Cost of equipment revenue for the quarter increased $8 million, up 11% from $7.3 million last year, primarily driven by an increase in personnel costs within the production, technical support, and quality assurance groups, and an increase this 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 the development of our next generation products and technologies, and an increase in the expenses associate with obtaining FAA certification for our airborne equipment on the CA North American side.

Increases in development of satellite systems and an increase in FAA certification-related expenses on the CA rest-of--the-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, and engineering design and development was 15.5%, versus 13.3% last year, as we have transitioned to supporting three technologies, rather than one technology, as laid out in our technology road map. Sales and market expenses increased 1.6% to $7.1 million from $7 million last year. CA rest-of-world increased due to the build-out of international sales and marketing teams. BA Increased to support the growth of their business. Expenses at 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 personnel expenses to manage the growth of the business, higher bonus, and legal expenses. The increase in CA rest-of-world G&A was due primarily to an increase in personnel expenses related to finance, HR, program management, an increase in legal fees to obtain regulatory approval for satellite service in 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 49.6% to $13.7 million, versus $9.2 million last year, driven primarily by the increase in the number of aircraft online at CA North America, and the expansion of our ATG network. We also recognize $0.7 million of accelerated depreciation for ATG components on certain aircraft scheduled to be retrofitted with our ATG-4 upgrade solution.

Other expense for 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 performance embedded in our preferred stock as a result of the conversion as part of our IPO. The second quarter of last year include 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 in the prior year quarter was only $0.5 million, because the credit facility was only outstanding for a short time in that 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 segment loss from CA rest-of-world. Between CA North America and BA, we generated $13.2 million, or 16.7% of 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 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. An increase of net loss was driven primarily by the preferred stock-related charges, increased interest expense, and depreciation and amortization that I mentioned earlier.

In our press release, we provide the definition of adjusted net loss, for which we add back the non cash charges related to our preferred stock return and fair value adjustments. We report adjusted net loss to eliminate the impact of such items, because we do not consider those indicative of ongoing operating performance, and because of their nonrecurring 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. If the number of shares outstand after the IPO were used instead of the respective weighted average share amounts, the 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 of TA, NA, and CA rest-of-world for both new installations and ATG-4 upgrades. Our cash CapEx, which we define as GAAP CapEx net of airborne equipment proceeds, increased to $28.8 million, versus $16.7 million for last year. In additions that are not included in the CapEx, on April 11, 2013 we completed the acquisition of Airphone for a purchase price of $9.3 million. In conclusion, we are very pleased with the financial 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 technology to expand our leadership position in the aviation market.

I would 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 and negative $6 million, our cash CapEx to be between $115 million and $135 million. Our full-year 2013 adjusted EBITDA guidance looks likes it's increasing investment in CA rest-of-world, particularly in the second half of the year. Operator, we're now open to take questions

(Operator Instructions)

Your first question come from the line of Simon Flannery with Morgan Stanley.

Thanks very much. Nice quarter. Could we, Michael, could we start on the international side? You talked about the FAA raydome testing and the Delta contract. When do you think we can start to see the Delta fleet coming online, given some of, it sounded like there some -- that it was taking longer than expected? Is there anything this year, or is it really 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'll be a lot of decisions be made. Where are we now, and when do you expect to be able to sign some new contracts there? Thanks.

Okay. Thanks, Simon. Our two objectives internationally are to start flying commercial satellite aircraft, and the gating item there on that first objective is FAA approval of raydome installations. As is becoming obvious, the FAA has increased their scrutiny. My conjecture is that they see that virtually all aircraft in the world will be getting large-scale ryadomes as connectivity proliferate, and rightfully they should be very concerned about the safety of flights. So we're working with them.

We're targeting an 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. It's in shareholders' interest. So we're work in close partnership with the FAA.

On the second question, international expansion, we are talking to the world's leading airlines. We have lots of proposals out there. We will announce them as soon as they come through. I'm not prepared to say any more than that at the time.

Great, thank you.

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

Thanks. I wonder if first we 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 uptake on flights that have been upgraded?

So first, the CapEx, we did describe during the road show that in some of our earlier contracts, we owed the carriers upgrades on some of their fleets, not necessarily all their fleets. In all their situations, the carriers are paying for the upgrade. We have not broken out percentages on how that falls, 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 ATG-4 on it, 312 as of the quarter ends. We know it works as designed at this stage.

We're seeing the increase in capacity, as predicted. A lot of the aircraft that received ATG-4 actually weren't all upgrade aircraft, so the comparison pre- and post were not done with that analysis. Also, planes don't fly the same routes consistently. So we probably have to wait another quarter before we really come out answering the customer behavior. But from a technical point of view, we are very confident in the performance of ATG-4.

Got it. And then on the business aviation side, as you said, I don't think it gets lot of attention. Can you talk more about the competition here for voice and broadband? Thanks.

Yes. So given the inherently smaller size of a business jet, satellite broadband solutions are not very applicable. They do exist. A few carrier -- a few jet owners that fly globally have that installed, but if you're over the United States, nothing competes with our broadband solutions. So we have the vast majority of all broadband installations in the US are Gogo's. For voice service it's a little more competitive, but we still -- these are our multiple technology solutions, the primary one being Iridium, 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.

Thanks, guys.

Thanks, Phil.

Your next question come from the line of John Hodulik with UBS.

Great quarter out of the gate, guys.

Thanks, John.

Two questions. First a follow-up to Phil's question on the business aviation. You talked about layering in the talk and text in there in '13. Can you just talk a little bit about what that is going to provide your customers, and whether we're going to see any sort of change in maybe the ARPU in the numbers as that gets rolled out? And then in the commercial aviation side, you had a strong quarter of installs. I think I remember seeing in the prospectus that you expected to install about 170 by the end of the year, from second quarter on. I don't know if that's the right number, but does that suggest you're going to see somewhat of a slowdown in the second half of new planes on the -- in North American side?

Yes, as currently scheduled there will be significant reduction in the number of installs in the second half of the year versus the first. The first half of the year, we completed the US Airways fleet, and we're at an elevated level doing that. So you're right to expect a material decline in the number of installs in the second half of the year.

So that 170 number still hold, I take it?

I'm not sure where you got the 170 number for it, but if that's your --

The 170 is good. We'll likely come in a little better than that.

Okay. Okay, thanks, Norm.

Yes.

And on 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 script text, talk as well as the smartphone, but there will be more. We think that will be helpful, not only to increase the average revenue per customer aircraft, it will be helpful in attracting additional aircraft owners to come to our service. So we're very excited, and you should look forward to announcements during the remainder of this year.

I would expect, since those come later in the year, I would expect a bigger financial bump to happen in 2014 versus 2013.

Do you guys charge more for that service on these business aviation jets when you're able to provide them with talk and text?

Yes.

They see -- all the planes see an automatic step-up in prices once you turn that service on, or it is a question of take rates and who signs up for that service?

Yes, they have to elect the service, and then the ARPU takes a bump up.

Okay, got you. Thanks, guys.

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

Great, thanks. I appreciated the disclosure today in 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.

So backlog, on the road show we said we had about 400 in backlog, and we've now installed about 100. So we have about 300 left in CA backlog. And now remind me of your additional questions?

Yes, the backlog in rest-of-world would be Delta.

Yes, Delta is the announced backlog in the rest-of-the-world.

Which is roughly 170 plans.

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

Yes, we have been running a relatively unadvertised limited amount of service, principally on American Airlines to date. We actually just rolled out a 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 back. That was one of the key challenges to solve. We think we're there. We're selling enough of it now, even on the unadvertised, unpromoted basis to really have a good sense of performance. ¶ You won't see -- revenues are nominal at this stage. They're beginning to ramp off a nominal basis. They won't be material this year. We should have good insight by the end of this year on how much we can expect for 2014.

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 were any further step-ups that we should be aware of as we model out the Company?

Yes, at this point, we have essentially achieved almost all the rev share triggers. As you know, there's a big bump in average rev share during 2012 from roughly 11% to 18%. We're at about 20% now. And we could expect to see over the next couple of years maybe another 2 point increase, but we're pretty much there at this point.

Thank you for taking the questions.

Hey, thanks, Jonathan.

(Operator Instructions)

Your next question comes from James Breen with William Blair.

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 sort of product that you're offering there, and just thoughts around sort of how that pricing works in offering those products, the actual type of media you're providing? And then on sort of longer-term strategy outside the US, 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 US can impact the amount of share that you can gain outside the US? Thanks.

Okay. Sure. Hi, Jim. So the media platform, there's various types of transactions or relationships we can have with partners. There's straight advertising, there's sponsorship, which means they underwrite the cost of some level of service for our customers, 15-minute, half-hour session maybe, or free access to Facebook. And by doing that, the engagement rate goes through the roof for the advertiser. There can also be e-commerce relationships, where they actually sell something in the sky, 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 e-commerce partners with us. They can do something different.

So one of our -- frankly, one of our challenges is how to, A, sell the benefit of customization but still have a repeatable business model that we can really describe 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 a business model over the coming quarters. It's still only $1.9 million in the quarter of non-connectivity revenue. We expect that to grow over time, and by the time it's a material number, I think we will give you much more insight into your question.

Share internationally, what I think is going to drive it hugely is that we know this business from an end-to-end operational point of view. Every airline in the world has pretty well figured out that it's going to be mission critical for them to have broad band connectivity to their planes, and to have a partner that can reliable execute for them, and not just walk in there with a bunch of power points is going to be very important. The fact we did our IPO and are well capitalized, airlines clearly want a partner that's going to be around for well beyond a decade, and we can check that box now at a whole different level. We also think our rate of product innovation, particularly in network technology, is going to be critical for airlines around the world. You can't sell just one technology today and expect it to last for the life of the aircraft. Aircraft live 40 years. Our technology cycle is 5 to 10, and so there is going to be multiple upgrades on a plane, and no one spends and invests against developing technology in the space like Gogo.

Great. Just one follow-up on financials between the US and the rest-of-world, or North America and 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 in that? Are the margins significantly different from an EBITDA perspective, based on the reselling versus running over your own network? Thanks

Sure. Over the longer term, Jim, domestic capacity will be supplemented and provided by satellite as well. When you look at the two businesses between North America and rest-of-the-world, over the longer term we expect a similar margin profile between the businesses. Between satellite and ATG, it's really a trade-off 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. On the satellite, the OpEx piece might be a little higher, we're not really making the investment to build the network. From a cash flow perspective, they pretty much net out, and over time as satellite gets -- we expect satellite to get less and less expensive, it should really begin to approach what ATG is. Longer term, I think the margin profile doesn't really change.

Yes, and what Norm's last point, or next to last point, was very critical. Satellite today, in our estimation, is considerably more expensive than air-to-ground, but over the course of the decade, at least the bandwidth cost between satellite and air-to-ground, will converge.

Great, thank you very much.

Sure.

(Operator Instructions)

Your next question is a follow-up from Jonathan Schildkraut with Evercore.

Thanks. Norm, you talked a little bit about seasonality of revenue growth in your prepared comments. 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?

Great. So we really don't have seasonality in operating expense, doesn't really fluctuate dramatically. The second part, one of the primary things we have going on in the international side is we have turned on the global network for KU satellite, and those expenses will build through the year. We haven't really disclosed any more granular detail about that.

I will add one comment, that we view global expansion as a 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 it takes to solve the FAA concerns to make sure our KU solutions are working for airlines to continue to -- our discussions and partnership with Immersat and Global Express, and continue to invest in proprietary solutions. We intend to win in the international arena.

You -- it is just Immarsat that you have relationship with, or is that just for KA band, or are they providing also your KU band conductivity? 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 the progress in the Company's development? Thanks.

So our partners, are Immarsat for KA global express solution, it's their proprietary global solution. The first satellite will launch this year, and service should begin around the first of 2015. And then we are currently partnered with SES and Intelsat for KU satellite capacity. The metrics I focused on, which I think drive it, and I would think you should be too, is getting satellite planes flying commercially and signing contracts, are the two metrics you should be looking for.

Thanks again for taking all the questions.

Sure.

You're welcome.

(Operator Instructions)

Your next question come from the line of [Saresh Gamarjeti], a private investor.

Hey, good morning. I have a quick question. What is the competitive edge of Gogo compared to other (inaudible) who is providing higher bandwidth?

No one provides more bandwidth to more planes than Gogo. We have nearly 3,700 broadband aircraft, and 1,000 narrow band and medium band aircraft flying, which is orders of magnitude more than any other competitor. It is our ability to always provide the most efficient, most powerful bandwidth to planes. It will be a differentiator for Gogo and our vast operational experience relative to our competitors should really make a big difference to airlines. Those are our two key assets, and now that we are well capitalized, I think we can match anybody out there in that regard, too.

All right, 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.

Thank you. This conclude today's conference. You may disconnect.