Gogo Inc (GOGO) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time I would like to welcome everyone to the third-quarter 2013 Gogo earnings conference call. (Operator Instructions)

I would now like to turn the call over to Ms. Varvara Alva, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Gogo's third-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 this conference call. The risk factors are described in our press release and are more fully detailed under the caption Risk Factors in our final prospectus filed with the SEC on June 24, 2013.

In addition, please note that the date of this conference call is November 11 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, and during this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

This call is being broadcast on the Internet and is available on the Investor Relations section of the website under ir.gogoair.com. The earnings press release is also available on our website. Finally, after management's remarks we will host a Q&A session.

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

Thank you, Varvara. I want to welcome everyone to our third-quarter earnings call.

Q3 was a great quarter on many fronts. We reported strong financial results highlighting the long-term attractiveness of our business model. We announced GTO, a game-changing new hybrid technology that expands our network capacity more than 20-fold.

We launched a stunning number of cutting-edge products and services for our business aviation customers. And we advanced our international expansion efforts by winning our first large foreign-based airline, Japan Airlines.

I would like to start by reminding everyone of the size of the opportunity before us and then give you a little more perspective on what each of these achievements I just mentioned means for Gogo.

Airborne connectivity in commercial aviation outside the US is a relatively untapped market, with only approximately 200 aircraft installed with broadband connectivity and only several hundred more firmly committed out of roughly 13,000 non-US commercial aircraft. Given the importance airlines now attach to broadband, we think most major airlines will make connectivity decisions over the next few years.

Likewise, broadband connectivity in the business aviation market so far has reached only 2,000 out of what we now view as an addressable market of approximately 20,000 aircraft in North America. Our growth strategy is simple -- increase the number of aircraft on our network by providing industry-leading connectivity solutions and to increase the revenue per aircraft by offering new services and raising penetration of existing services.

Now let me turn to our financial results. We reported record quarterly revenue of $85.4 million, up 48%, and also achieve consolidated EBITDA of $2 million despite our $11 million investment in international expansion. Our service revenue represented 75% of total revenue; improved 52% year over year, demonstrating strong demand for our connectivity services across both CA North America and BA.

Our operating expenses were up roughly commensurate with revenue, but it is important to note that we are investing heavily in our strategy to grow the number of aircraft on our network and to introduce new services, including expenses associated with a global satellite network for Delta, JAL, and future airline partners, regulatory approvals to operate in well over 100 countries, several FAA certifications in order to install equipment on new fleets of aircraft, a wide range of new products and services, and development of industry-leading connectivity solutions.

At the end of Q3 our service was available on over 2,000 commercial aircraft across nine major North American airlines. In business aviation we had over 1,800 aircraft equipped with broadband connectivity and more than 5,100 aircraft equipped with satellite communication services. Our nearly 4,000 broadband-connected aircraft make us the largest in-flight connectivity company in the world by a very wide margin.

Now let me turn to bandwidth. Our 52% year over year service revenue growth was almost identically split between BA and CA in percentage growth terms. Growth at CA was driven by a 21% increase intake rate, a 15% increase in gross passenger opportunities, and only an 8% increase in revenue per session. This strong usage growth highlights the need to increase bandwidth.

Our first technological chance to do this is ATG-4, which triples peak speed for aircraft to 9.8 megabits from 3.1 megabits per second. As of September 30, we had 367 aircraft equipped with ATG-4 and expect 450 to 500 by year-end, depending on aircraft availability.

What is even more exciting is our ground-to-orbit technology which we announced in September. It is truly a game changer. Our latest test demonstrates that GTO will increase peak speed per aircraft more than 20 times from 3.1 megabits per second to 70 megabits per second.

The GTO system will use a KU receive-only antenna for the forward link and ATG technology for the return link. Because it is receive-only the GTO satellite antenna is about two times more spectrally efficient than other antennas in the marketplace. The antenna also has a much lower profile, which is both bird friendly and results in lower fuel burn to the airlines.

Finally, it doesn't require FCC approval for service. We expect to launch GTO on Virgin America aircraft in the late summer of 2014. We think GTO is an example of our engineering superiority in the in-flight connectivity industry, and we believe it will provide the bandwidth needed to meet our revenue growth expectations in North America for several years.

Let me now turn to BA, Gogo's hidden gem. BA continues to demonstrate high revenue growth rates, expanding margins, low CapEx, and significantly positive free cash flow. This quarter BA revenue grew 42% and segment profit increased 70%.

While financial performance for the quarter was great, our engineering accomplishments may be even more impressive. BA delivered many new products and services -- Gogo Text & Talk, Gogo Vision, Gogo Cloud, Gogo OnePhone, universal cabin system, and ATG 2000. This extraordinary list of technology and product innovations not only meaningfully expands our addressable market of business aircraft, but will increase revenue per aircraft as well.

Gogo Text & Talk is a revolutionary new service that enables our BA customers to use their own phone and phone number to text and talk over our ATG network while they fly. Our BA customers that already have installed an ATG broadband system only need a software key to activate this app-based service. Once customers have the app they can use their phone and their phone number to make and receive calls and text in the air, just as if they were on the ground.

Furthermore, last week we announced that we are bringing Gogo Text & Talk to commercial aviation in 2014. We also announced Gogo Vision for business aviation. Our in-flight wireless entertainment service is a great way to access the latest TV shows and movies while in flight.

For the convenience of our BA customers, we have created the first nationwide digital content delivery network to the aero market, Gogo Cloud. Gogo Cloud enables fast content updates while the aircraft is on the ground. Signature flight support will deploy Gogo Cloud at most of its FPOs, three of which are operational today.

And we announced Gogo OnePhone, our new cabin phone for business aviation. Most business jets today have an antiquated corded phone. Our cordless, Android-based OnePhone offers superior voice quality and the industry's most advanced noise cancellation technology. This world's first smartphone specifically designed for aviation works over satellite and our air-to-ground broadband networks.

Our universal cabin system is a transformative new box in the industry's first all-in-one smart router and media server. Think of this sophisticated compact piece of the airborne equipment as a communications nerve center for aircraft.

Finally, a few weeks ago we announced ATG 2000, which is a scaled-down version of our existing ATG system, thereby expanding the number of aircraft we can add to the network. ATG 2000 targets the turboprop market of approximately 8,000 aircraft. Combined with 12,000 business jets in North America our addressable market now expands to 20,000 aircraft.

By being the largest player in the in-flight connectivity industry, we have the scale and financial capability to make the R&D investments to grow bandwidth and rapidly introduce new services, all in support of our strategy of growing the number of aircraft on the network and increasing revenue per aircraft.

Finally, I cannot be more thrilled to discuss our new international commercial aviation partner, Japan Airlines. We signed a contract with JAL for its entire domestic mainline fleet of 77 aircraft to be outfitted with Gogo's KU connectivity system. We are honored to be chosen to provide JAL's passenger access to connectivity that we expect to start in the late summer of 2014.

The international market presents a significant growth opportunity for Gogo, and as you know, we are aggressively going after that opportunity. Between Japan Airlines' and Delta Airlines' international fleets we now have close to 250 aircraft under contract for KU connectivity service outside the United States. We are targeting the first of these aircraft to be flying by the end of the year.

To wrap up, I am very pleased with our results and achievements to date. We had an outstanding third quarter highlighted by strong financial results, significant technology advancements, and new product innovations -- all capped off by our contract announcement with Japan Airlines.

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

Thank you, Michael. Good morning everybody. Very happy to report that we had a (technical difficulty) quarter. We saw a significant strength in the operating performance by CA North America and BA, and we are very pleased with the trends in these businesses.

We achieved record revenue of $85.4 million for the quarter, up 48% versus the third quarter of last year. Our service revenue of $63.8 million was up 52% and our equipment revenue of $21.6 million was up 36% versus last year. Our adjusted EBITDA of $2 million more than tripled versus the third quarter of last year, despite an $11 million segment loss in CA Rest of World, which is in the startup investment phase.

Let me now give you some additional color by business segment starting with CA North America. Revenue of $50.6 million was up 53% versus the third quarter of last year, driven by a 50% growth in conductivity revenue with across-the-board increases in single, subscription, and non-retail revenues. Our connectivity take rate of 5.8% was up 21%, reflecting continued strong growth in demand for connectivity which we are very pleased with.

Our gross passenger opportunity of nearly 79 million was up 15% and our average revenue per session of $10.63 was up 8%. This all translated into an increase in our average revenue per aircraft, or ARPA, of 21% to $8,300 per month, indicating an annual run rate of just over $100,000.

Another milestone this quarter is our new agreement with Delta that is the first monetization of our operational application opportunity. Under this new contract with Delta, we are providing connectivity for all retail credit card charges incurred by passengers on the plane. Let me remind you that year-over-year revenue growth rates in future quarters will no longer benefit from price increases implemented during the fourth quarter of 2012.

The CA-NA segment loss of $1.6 million for the quarter represents a $2.6 million improvement over the third quarter of last year. CA-NA operating expenses increased for the quarter, driven by an increase in cost of service revenue as a result of a 52% growth in service revenue and increases in engineering and G&A expenses as we continue to develop next-generation products and technologies such as GTO, incur FAA certification expenses, and hire additional personnel to support the growth of the business and the requirements of being a public company.

Let's now turn to BA. As Michael mentioned, BA had a record quarter. Revenue of $34.8 million was up 42% versus the third quarter of last year. Service revenue was up 51% and equipment revenue was up 37%.

During the third quarter we continued to see strong demand for our ATG broadband service and equipment. The number of ATG aircraft online increased 41% to 1,847 and we shipped a record 260 ATG Gogo Biz systems for the quarter. The number of satellite aircraft online increased to just over 5,100 and we shipped 172 satellite-based systems for the quarter.

BA segment profit increased 70% to $14.6 million for the quarter as the increase in high-margin service revenue drove this segment profit margin from 35% to 42%. We are also very excited about the prospects for the new BA products and services Michael spoke about earlier. Gogo Text & Talk and Gogo Vision will be incremental to our current ARPU and we expect to see continued increases in ATG units online as Gogo Biz systems remain in high demand.

Finally, let's discuss CA Rest of World, which as you know is in the startup phase. For the quarter, with essentially no revenue, Rest of World generated an $11 million segment loss as we continue to invest in developing this business.

The segment loss increased by $7.2 million versus the third quarter of last year due to a $5.4 million increase in the cost of service. This was primarily driven by the cost of satellite capacity for our global KU satellite network that started in October of 2012. In addition, we incurred higher expenses related to the development of satellite systems, FAA certification, regulatory approval, and personnel expenses -- all due to the ramp up in Rest of World activities.

So on a consolidated basis our adjusted EBITDA increased to $2 million for the third quarter, driven by a $6 million increase in BA segment profit, a $2.6 million decrease in CA-NA segment loss, partially offset by a $7.2 million increase in Rest of World segment loss. Net loss attributable to common stock decreased to $18.7 million for the quarter and was $0.22 per share versus a $29 million net loss attributable to common stock and $4.27 per share loss for the third quarter of last year.

Adjusted net loss attributable to common stock was the same as reported net loss for the third quarter since all of our preferred stock converted to common at the end of the second quarter. Adjusted net loss attributable to common stock increased $18.7 million for the quarter, or $0.22 per share, versus a $13 million net loss attributable to common, or a $0.16 per share net loss, for the third quarter of last year.

Capital expenditures increased to $27.9 million for the, quarter, up from $23.2 million for the third quarter of last year. The increase in capital expenditures was due to increased investment in our ATG network, capitalized software, and airborne equipment for CA Rest of World. Cash capital expenditures, defined capital expenditures net of airborne equipment proceeds received from the airlines, increased to $24.5 million for the quarter compared with $20.7 million for the same period last year driven by the same reasons above.

In conclusion, we are very pleased with the financial and operating performance of the business. We ended the quarter with $285 million of cash on the balance sheet. We are well capitalized to aggressively go after the large international opportunity Michael spoke about earlier and to continue to invest in next-generation technologies to expand our leadership position in the market.

Now I would like to spend a few minutes on the business outlook.

Given the strong year-to-date performance in CA-NA and BA, we expect to exceed previously issued guidance for 2013. We are raising our full-year guidance as follows.

We are increasing the high end of total revenue guidance to $325 million, up $10 million. By segment the CA-NA high-end revenue guidance is now $198 million, up $5 million, driven by strengthening demand for our connectivity products. The BA high-end revenue guidance is now $125 million, also up $5 million, driven by strength in ATG equipment and service revenue.

We are leaving CA Rest of World revenue guidance unchanged at under $2 million. We are also increasing the high-end adjusted EBITDA guidance to $10 million, up from zero, as we now expect to generate positive adjusted EBITDA for the year as a result of the projected revenue increase and lower operating expenses. We expect part of the operating expense savings related to certain program spending to shift into 2014, particularly as it relates to CA Rest of World, and to a lesser extent, CA North America.

Finally, we now expect our cash CapEx to come in below $115 million, the low end of previous guidance. While we don't give guidance on free cash flow, we do not expect the full benefit of improved adjusted EBITDA and capital expenditures in our free cash flow due to a higher use of working capital for certain items, including prepayments and deposits under our satellite capacity agreements.

Operator, we are now ready to take our first question.

(Operator Instructions) Simon Flannery, Morgan Stanley.

If I can start, the FAA has allowed the use of personal electronic devices on the ground and below 10,000 feet. Can you just comment on, one, the opportunity there; and two, how that might work from an engineering standpoint?

Then if you can comment on the GTO discussion since you announced that product, how are you getting on with your other customers beyond Virgin in terms of their interest in that product? Thanks.

Thanks, Simon. Good morning. It is Michael. First, the 10,000 foot ruling by the FAA to allow you to now leave your devices on from basically gate to gate in airplane mode using Wi-Fi but not cellular signals, we think is a reflection of how badly people want to be connected. They went to Washington to lobby to be connected in more places and more times, and that is a great trend for us.

We think it is another nice tailwind in our business, but fundamentally we are bringing the mobile Internet age to aircraft and that is just one more of many tailwinds.

As far as engineering goes, we are evaluating it for both our satellite and our air-to-ground solutions. It is easier to implement engineering for satellite, but it can be done for air to ground, basically by reconfiguring how the cell tower antennas point; maybe even adding cell towers around airports. But it is also more expensive for the satellite solution to go to the ground, and it is just more bandwidth, more time, in today's satellite is more expensive than air to ground.

So, in summary, easier engineering for satellite but more expensive for satellite to make it work to the ground.

On your other question related to GTO, we have just begun the discussion with the airlines. The first one, which Virgin is critical because it allows all the certification work to happen. And that is why we love getting the first one even more than simply market acceptance; it is important for timelines.

But the airlines get the amount of capacity this brings. They also see how good this would be for television solutions down the road. They see that it is a lower drag [ratom] and saves what could often be tens of thousands of dollars of fuel burn per aircraft per year. And as we mentioned, since it is only half the height and can actually be built with beefier edges on the [ratom]. It is very bird-strike-friendly and be easier on the FAA standards.

Great, thank you.

James Breen, William Blair.

Thanks for taking the questions. Two parts to the question. First, with the texting product that you guys are going to start to offer, any thoughts around pricing there relative to the full Internet products; how that is going to be introduced?

Then, secondly, with the international markets is there any color you can give us around how those agreements work relative to revenue sharing compared to where the US agreements are? Thanks.

Sure. Thanks, Jim. Texting product is clearly a lower price point product and a much lower bandwidth product, so we love it. We think it is going to be a way to engage a significant percentage of the aircraft in commercial aviation.

It has already had a tremendous reception in business aviation. The fact that you can use your own phone and your own number not only to make but to receive calls or text -- it will only be text in commercial aviation, at least for quite some time, in the United States. But it is an extraordinarily profitable product.

We can also match -- and I am striking a whole bunch of wholesale arrangements or sponsorship arrangements. We think a lot of other players, the airlines in particular, maybe some of the wireless carriers on the ground, will be highly incented to have this service included, the texting included. So we are also exploring that Avenue. But it is going to be a low-priced product relative to our full Internet access.

On the international side, can you repeat exactly your question again?

I was just wondering about the contract structure there. Will it be similar to the US carriers or North American carriers in terms of revenue sharing and so forth?

Yes. We are using the same basic starting point for negotiations with international airlines. The industry advances and change and there is a wider range of products and services. And the airlines are seeing that our service is not just a customer Internet access service, but it is totally transformative to the airline business.

So in some ways you have to consider more in today's negotiations than you used to. You have to think about operational apps for the airlines, as well as passenger-facing solutions.

Great. Thank you.

Philip Cusick, JPMorgan.

Thanks. I guess, first, pushing out the CapEx should we assume that that is all associated with Delta coming a little later than you expected?

Actually, the CapEx reduction relates more to primarily reduced sell-side construction this year. We have taken a longer view that we will be building a little bit fewer cell sites than we were thinking six months ago. So that is the biggest piece of it actually, Philip.

Some of it will be related to software around the rollout of Delta, but the primary factor is reduced number of cell site construction.

Okay. And the cell sites, are those US or Canada or both?

They are principally --

US.

-- US. In managing bandwidth, we constantly are optimizing our main levers today -- building cell sites, doing cell site splits, and deploying ATG-4. And over time it will be introducing GTO and other satellite solutions.

Right now, we are concluding we get the most leverage, the biggest bang for the buck in getting ATG-4 out there and our capacity enhancements.

Okay. Then shifting over to the BA side, we are seeing ATG net adds really accelerating here. Can that continue to accelerate? What are the trends you are seeing from customers?

As we said in our prepared remarks, we have expanded the addressable markets to 20,000 aircraft so -- and we have less than 2,000 installed today. There is tremendous opportunity for this to keep going. Every day it becomes more a central part of the business aviation industry that you have our service on board.

We see $25 million used jets for sale where it says jet with Wi-Fi with Gogo. It is often the distinguishing characteristic. It is hard to charter aircraft if you don't have Gogo on the plane, so I think there is a lot of reason to be optimistic that we can keep strong sales rates in VA.

(multiple speakers) Besides expanding the addressable market, as we add more products -- Text & Talk, Gogo Vision, the content delivery at the FPOs when you pull your plane in and get automatic updates for your Gogo Vision movie list -- just adds more and more demand for the air-to-ground service which it's all based on.

You mentioned you increased the addressable market. Is there a category of planes that you now think you can address that you didn't before?

Yes, that is that turboprop market, so the King Airs, which are -- there is 8,000 of them. And we are starting to see a little bit of our products go into that market, even before this introduction, but with the lower price point.

Basically the ATG 2000 limits the number of users to three as the biggest single difference between our other product. And I think it only supports one phone line instead of two, but that is probably not as relevant to as many aircraft.

So, yes, there is another 8,000 aircraft that we can address now.

Great. Thanks, guys.

Jonathan Schildkraut, Evercore.

Hi, this is Marc Albanese on for Jonathan. Just a couple.

First, on BA we saw a nice accelerate in segment profit margins. Can you talk about the longer-term margin trajectory for the business and how you see vision and text helping on that front?

Secondly, on GTO, with that technology installed what kind of take rates do you think you can support on those four planes? And given the additional capacity, how will you balance pricing versus take rates and how will you employ traffic shaping? Thanks.

I will take the second one and then Norm will answer the first one on the margins in BA. But GTO had a factor of 20 times where we started. We can clearly handle the entire plane at the amount of bandwidth we are allocating per passenger today and still have some left over to invest a little more in improving the experience for each customer.

So we are going to start installing that in 2014 and really have a major impact in 2015, and so I'm not prepared to predict ahead that far on exactly how we will price it and allocate the bandwidth. But we will have a lot more flexibility. It is a major step up; it is a quantum leap.

On the margin side for BA, as we add more product offerings like Text & Talk, Gogo Vision, those are very, very high margin types of products. It will add incremental increases to the ARPU, so over the longer term those will help margins.

Where we spend our money is on the R&D. As we tried to highlight in the script, we had a phenomenal amount of new product innovations and we spent a decent amount of money to make that happen, but once you have created the product there is tremendous incremental margins.

Right. Thanks, guys.

[Carter] (inaudible), [Jupiter Web Strategy].

Good morning, fellas. Congratulations on a fantastic quarter.

Can you talk to -- outside of the revenues that you are getting from customers can you talk to the opportunities in marketing, in advertising from corporations advertising on your network?

Sure. We had a little over $2 million of non-connectivity revenue in the quarter. We continue to see major advertisers around the world really want to participate with us.

It is a unique situation. It is a captive, upscale, undistracted audience. Engagement rates are off the charts compared to what advertisers find in other venues.

We think that is a substantial opportunity going forward. Our strategic decision is aircraft first. Build the addressable market, get on the planes, but we see developing today but down the road a real opportunity to develop the media platform.

Thank you very much.

(Operator Instructions)

All right. Thank you very much, everyone. We are very excited about this quarter and looking forward to a continuing dialogue with all of you. Have a great day. Thank you.

Thank you all for participating in today's conference call. You may now disconnect.