Gogo Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day ladies and gentlemen and welcome to the Q1 2016 <b>Gogo Inc</b> GOGO Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance please press star then zero on your touch tone telephone. As a reminder this conference call is been recorded. I will now like to turn the conference over to Miss. Alva, Vice President of Investor Relations and Treasurer. You may begin.

Varvara Alva:Vice President, Investor Relations:

Thank you and good morning everyone. Welcome to Gogo's First Quarter 2016 Earnings Conference Call. Joining me today to talk about our results are Michael Small, President and CEO; and Norman Smagley, Executive Vice President and CFO.

Before we get started, I would like to take this opportunity to remind you that during the course of this call we will make forward-looking statements regarding future events and future financial performance of the company. We caution you to consider the risk factors that could cause the actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described in our earnings press release and are more fully detailed under the caption Risk Factors in our 10-K which was filed with the SEC on February 25, 2016. In addition, please note that the date of this conference call is May 6, 2016. Any forward-looking statements we will make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. This call is being broadcast on the Internet and is available on Investor Relations section of Gogo's website at ir.gogoair.com. The earnings press release is also available on our website. After Management's remarks, we will hold the Q&A session.

And now it's my great pleasure to turn the Call over to Michael.

Michael Small:President & CEO:

Good morning everyone. Thanks Varvara. We're off to an amazing start in 2016. We had record revenue of $142 million, up 23% year-over-year.

We also had record adjusted EBITDA of $14.5 million, up 76%. But most importantly we marked the beginning of our next chapter, the error of 2Ku has officially taken flight, the service is flying on AeroMexico as we begin the enviable task of installing the growing number of committed aircrafts. We have massive momentum of 2Ku beginning with our announcement yesterday that International Airlines Group has decided to install 2Ku on British Airways, Iberia, and Aer Lingus long-haul aircraft. IAG has one of the largest aircraft groups in the world and we couldn't be happier to be connecting some of the most iconic brands in commercial aviation.

We also entered the Chinese market by announcing we'll partner with Shareco to install 2Ku on 50 Hainan and Capital Beijing aircraft and in North America we agreed to extend our relationship with Air Canada to 2Ku and its entire widebody international fleet. Lastly Delta increased their commitment to more than 600 2Ku aircraft bringing our 2Ku awarded aircraft over the 1,000 mark.

I also want to highlight a couple of other developments that are critical to our commercial aviation business and specifically 2Ku. We secured large capacity commitments with Intelsat and SES. We also added the ability to leverage one LEO constellation when it comes online in the next few years which will have huge advantages in terms of coverage and latency. We've built 2Ku with an open architecture that allows us to take advantage of high throughput satellites, OneWeb, and any other new developments that happen in the Ku bands.

In addition to securing a lot more capacity at lower costs, we unveiled our powerful new modem capable of delivering 400 Mbps. This will make sure the bandwidth delivered to the plane won't be limited by the modem. It also gives us plenty of room for growth.

All this means that 2Ku is getting better even as we're just beginning to install it. Most importantly, these improvements can be implemented on 2Ku installed aircraft seamlessly which is incredibly important to airlines. It means that our airline partners who choose 2Ku will stay future ready and ahead of the curve.

In both business and commercial aviation, our aircraft-centric approach to operating this business gives us tremendous advantages. For example, we are making great progress on the increasing volume of STCs, completion of which will keep us on track to exceed our 75 2Ku installation target this year. This will be a critical step in getting the 1000th 2Ku awarded aircraft installed and generating revenue.

We also signed agreements for Airbus and Boeing to have 2Ku installed on their A350 and 787 aircrafts. So now we can offer airlines 2Ku on every major mainline aircraft type. All told, we installed or upgraded more than 500 aircraft across commercial and business aviation this quarter, another company record. Nearly 50% of our commercial aviation aircraft have now then upgraded to ATG-4 for adds much needed capacity to our North American network.

Q1 has also been incredibly busy for business aviation. Gogo Biz 4G is now flying on our test lab and customers are beginning to provision their planes in preparation for 4G's commercial launch in 2017 and with record quarterly profits of $20 million, BA is off to a strong start in 2016.

To close we started 2016 firing on all cylinders. 2Ku is now in commercial service, 2Ku awards now exceed 1000 aircraft and our financial and operating results continue to set records. We feel better than ever about 2Ku's capabilities. We look forward to the day when the first 1000 2Ku aircraft are online and on that note turn it over to Norm.

Norman Smagley:Executive Vice President and Chief Financial Officer:

Thank you, Michael and good morning everyone. We had a great first quarter. Total revenue was up 23% to $142 million. Service revenue grew 24% to a record $119 million.

CA North America and BA combined segment profit was up 29% to $34 million. Our combined segment profit margin expanded to 25%. Adjusted EBITDA increased 76% to $14.5 million. This was our best EBITDA quarter ever.

Now turning to segment results, CA North America service revenue was up 16% to $83 million driven largely by an increase in aircraft online. We ended the quarter with 2500 North American aircraft online which reflects 130 installs and 17 returns. We also had 230 net awarded but not yet installed aircraft at quarter end.

During the quarter we installed or upgraded a record 219 ATG-4 aircraft, almost double our previous highest ATG-4 install quarter. This things our total ATG-4 aircraft online to nearly 1,200. The better align our plane count was how we recognize revenue, we are introducing aircraft equivalents which depicts our plane count segment based on where the aircraft flies rather than on which segments the underlying airline contract is associated with. Moving forward we will use aircraft equivalents when calculating our book.

For the quarter, annualized ARPA of $134,000 was consistent with the prior year but grew 15% year-over-year excluding aircraft we've added since the beginning of 2015 primarily regional jets and aircraft with ne airline partners. We also had large Gogo Vision launch promotion in the first quarter of 2015. We expect continue ARPA dilution over the next couple of quarter as we finish installing regional jets and launch new airline partners. The dilution from these aircraft will start to diminish as these new fleets become seasoned and as we begin to update Delta planes with 2Ku.

We expect ARPA growth to be modest in 2017 and accelerate in 2018 as we get more to 2Ku aircraft online.

CA North America segment profit was $13.8 million representing a 16% margin. It was up year-over-year as a result of continued strong operating leverage.

Now turning to BA , service revenue was up 41% for the second straight quarter to $31 million. Total revenue for the quarter exceeded $50 million for the first time.

BA equipment revenue of $19.4 million was slightly lower due to lower ATG units shipped partially offset by higher average revenue per unit. ATG aircraft online increased 23% to nearly 3700 and ATG service ARPU increased 15% to almost 2500 per month. Segment profit was up 20% to $20 million, representing 40% segment profit margin.

Turning to CA rest of the world, we installed 35 aircraft and ended the quarter with 237 aircraft online. Total revenue for the quarter was $4.6 million, up three fold from the prior year. Our CA rest of world backlog stands at over 600 awarded but not yet installed aircraft including new wins across the world from -- Air Canada, and Shareco China. We expect to install the majority of our awarded aircraft by the end of 2018.

Rest of world segment loss increased to $19.7 million from $18 million last year. The increase was due primarily to higher -- expenses related to 2Ku STC and activities.

Q1 cash CapEx was $24 million was nearly $8 million lower than the prior year due to lower airborne equipment purchases and CapEx for the headquarters build out. We entered Q1 with $313 million of cash. As expected Q1 has higher payments and additional principal payment under our credit facility. Cash used in the quarter is consistent with our full year expectations.

To wrap up , our strong financial performance in the first quarter coupled with increased momentum in the market for 2Ku, give us a strong tailwind for continued growth in revenue and profitability.

Operator, we are ready to take our first question.

Question & Answer

Operator:

Thank you. Our first question comes from Jonathan Schildkraut with Evercore ISI. Your line is now open.

Jonathan Schildkraut:Evercore ISI:

Great. Thank you. I am here with Rob. I guess a couple of questions, first I was wondering Norman if you can give us a little bit more detail on the equipment revenues in North America for the quarter.

Obviously that came in a little bit higher than we were anticipating. Just wanted to get any color there and if you can give us some sort of margin color on that as well and then I'll come back with a strategic question. Thanks.

Norman Smagley:

Sure. So as we get into new airline deals, the structures are accounted for deal-by-deal basis. So we have two agreements where we recognize equipment revenue for sales, one is United which we talked about previously and the second is AeroMexico for the Gogo Vision installations. We do recognize equipment sales for that particular transaction.

Jonathan Schildkraut:

Great and...No, if you've been able to launch.

Norman Smagley:

Okay. We don't give specific margin guidance on deal-by-deal basis. So I'll refrain on that piece of it.

Jonathan Schildkraut:

All right understood so listen I'd love to get a little bit more color on what's going on with the backlog, thousand planes in the 2Ku backlog is obviously a massive number even relative to the size of the satellite or the overall commercial airline market. I was wondering I guess if you could give us a little understanding there are some numbers here I am having a hard time reconciling.

The US backlog or the North American backlog is at 230, the backlog for RW is more than 600, and yet the 2Ku backlog is over a thousand and I guess the last time you guys put out a 2Ku backlog it was around 850 and then you added looks like another 350 from Delta than the recent agreement looks like 150 and I guess now it's more than a thousand and there has been a lot of numbers to look around so may be some clarity here to give us a little better picture would be very helpful. Thanks.

Michael Small:

Hi Jonathan, it's Michael. I'll give you some clarity there. So, the increase from 850 to over a thousand reflects the IAG announcement like we said was a 130 sum and then some additional Delta aircraft from what had already been included in the 850 and then don't forget a whole bunch of the 2Ku backlog is for upgrades, not new aircraft. So when we talk about the backlog by segment, those are only for new aircraft not the upgrade aircraft.

Jonathan Schildkraut:

Great. So that's a net new.

Michael Small:

Yes. Net new.

Jonathan Schildkraut:

Okay great. One last question if I may, I think from our seat obviously we don't the visibility into the business that you do but surely conversations we're having a lot of them revolve around business model and business model changes, that is Gogo has built a brand in the retail market. People understand and know what that is but it seems more and more we're hearing that there is a push towards wholesale and I'd love to understand what your perspective is whether the market will end up retail or wholesale and then ultimately and I think this is the challenge that we have given how nascent the business is on a global basis, how does that impact the way we should be modeling the company or thinking about forward projections? Thanks.

Norman Smagley:

Okay thanks. Great question and right now the vast majority of our business is the turnkey or retail model and we see nothing changing rapidly. We do think that as bandwidth gets cheaper, it's going to make a lot more options available to different airlines and so we do think this will evolve. We also think as our platform is a software platform so we can empower airlines to do different things, get more sophisticated, also see change but right now I feel nothing eminent. I think it is a pretty -- process.

Jonathan Schildkraut:

Alright great. I will swing back into the queue. Much appreciated.

Operator:

Thank you and our next question comes from Phil Cusick from JPMorgan. Your line is opened.

Phil Cusick:JP Morgan:

Yes thanks. Two and a little bit as a follow up. So how should we model the satellite commitments impacting cost in the international and domestic businesses? I guess that's first and then second, on the business model following up a little bit it seems like the debate is whether you can stream video or not long-term to customers is something people talk a lot about. How do your customers talk about? How important is live video streaming to your big customers over the next five to ten years? Thanks.

Michael Small:

Okay. So two issues; one is we just bought a lot more capacity at a much lower price and do not commit any material additional dollars. So that very little, incremental fixed cost then our new capacity commitment. So it’s just basically bandwidth is lot cheaper. We want to buy enough bandwidth so we have near term visibility to capacity. We don't want to buy too much today and so we can capture the ongoing declining cost that we would expect and satellite capacity and then the..

Phil Cusick:

Well so Michael on that, so we shouldn't look for any sort of cost, ramp and especially in international business because of these commitments. Or not the significant comp

Michael Small:

No, not because of this, no it’s highly variable as we bring on the business well at the bandwidth and we just a brought a lot more bandwidth at a much better price. So we are not taking of this fixed cost risk and we will continue to buy more bandwidth as the business continues to grow.

Phil Cusick:

Right.

Michael Small:

On streaming, yes everybody wants to upstream and we are now in the world with 2Ku were streaming is available and customers were able to stream the way they want to steam and I am very comfortable will be able and meet the needs of an entire aircraft no matter how big that aircraft is. Anybody can construct the scenario, they can prove couldn't meet that particular crazy possibility, but as we see the world on folding and the way people want stream on clients Gogo they able to provide that and we will do it more economically than anybody else in this industry.

Phil Cusick:

So, I guess I should to follow up little bit there and there is huge number of variables that could go into this. But can you give us a little bit a color on what that might caused I mean anybody can support streaming at the right price for a bit. But, what do you think that costs to support streaming for customers on 2Ku over the next five years is satellite capacity goes up?

Michael Small:

So, I am not I am going to give a cost per bit but we have said itself by a factor of three relative to our expectations in the last year and we already had expectations that it will be declining and as we sit here and see on the formats we're getting from 2Ku today and then we see the benefits of the high-throughput satellites and then we see the benefits of our new modem and those are very clearly in our roadmap and then we see the possibility of the lower to orbit satellites coming on. We seen in a very seamless express to weigh on the -- drive the cost curve down and to be able to provide video, streaming very similar the way people experienced on the ground.

Phil Cusick:

Okay and then just to go back to -- taking my question as you talk to your airline customers. Is this part of what they say we need to have this is availability we need to make sure that we don't walk ourselves on to that in case it becomes important?

Michael Small:

Absolutely, that's exactly and from our discussions with for example -- they we've always wanted -- to make a decision to adopt in flight connectivity in a large way because they want an answer that was going to work on for streaming and what's going to meet the needs their customers and I believe that it became convinced 2Ku was the answer that finally met their needs on a global basis.

Phil Cusick:

Thanks. That helps.

Operator:

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

Lisa Friedman:UBS Securities LLC.:

Hi, it's Lisa for John. I just wanted to ask two different things. One any update on American and where there might be taking a decision and two give a little color on the prepared remarks I know the take rate in North America declined last quarter and ARPA actually was like it was sort of flattish down slightly year-over-year I assume that you through the inclusion of RJ space and I just wondered if you could give us color on what fraction of base is -- now. Thank you.

Michael Small:

Okay. So I will take the first and Norm and I together will answer the second half of that. So we've submitted our 2Ku proposal to American and we are waiting still waiting their response, but we expect to have long term relationship with American. However they answer on this particular deal comes out that we just hit 1000 aircrafts installed with American airlines cross that milestone in the first quarter and we are actually upgrading very rapidly to ATG-4 with them and with performance of 2Ku in market place both of flying on there in Mexico and is being adopted by many airlines and we think American will be look that really, really hard.

Norman Smagley:

So Lisa in terms of color on the ARPA and take rate etcetera. The ARPA reflects the reduced take rate offset by the increase their -- and the dilution in ARPA will caused by primarily RJs and some new mainlines of the new airline partner represents roughly 20% of the full aircraft at the end of the first quarter.

Lisa Friedman:

Okay.

Norman Smagley:

So we have had very rapid installs over the course of last year mostly our case and new airline partner and between those two, it's diluted and the base as we pointed out in press release the ARPA grew 15% if you look at some plane sales from the year ago.

Michael Small:

And one thing to keep in mind when you're launching a new airline, it takes a while for that airline to season and mature. So it's not in any way reflective of any less quality for any particular new airline. That just takes a while for the customer base of the airline to realize it's available ubiquitous and takes advantage of the service.

Lisa Friedman:

Which airline is this?

Norman Smagley:

We're not to mention airline by name but you should be able to figure it out.

Lisa Friedman:

Okay. Thank you.

Michael Small:

But it's true with any airline.

Norman Smagley:

Any airline.

Michael Small:

I was making a general statement...

Lisa Friedman:

Okay.

Norman Smagley:

And also you've seen with the we saw with rest of the world launch too it took a while by the end of about the first year, the rest of world aircraft were having ARPA disclose at or above what we do in North America. So it just takes a while when you launch a brand new airlines to get it up to speed.

Lisa Friedman:

thanks

Operator:

Thank you. Our next question comes from Dick Ryan from Dougherty. Your line is open.

Dick Ryan: Dougherty:

Thank you. No I'm looking OpEx, it looks like a nice improvement from Q4 kind of going back to where it was Q3 last year. Can you talk a little bit about what room they have and how we should model that going forward for the rest of year?

Michael Small:

I think it's fairly represented what you should expect for the rest of the year. We'll see modest increase on OpEx as we continue to focus on 2Ku rollout as we build our capabilities to execute on that plan. But it should be representative of the year.

Dick Ryan:

Okay. I think you are working on, what 15 or so FTC programs, have any of those ticked off yet or how will that spend moderate either second half for this year as you get into 2017.

Michael Small:

We will for the next year plus well into next year have a very aggressive FTC program. They will start popping during the course of this year but the beyond the 15 there will be more including as the aircraft types for IAG all the through the A380s, 787s, and the 777s. At this stage under contract with the airlines around the globe we have every major aircraft type in works at the moment.

Dick Ryan:

Okay. And it looks like you included the 50 Shareco planes in backlog. Has that moved to a definitive agreements yet and Michael can you comment on your licensing efforts in China?

Michael Small:

First, we can't disclose anything about the status of Shareco at this stage in the negotiations and of course file on the material agreements as required but till we do we won't comment on that. And the licensing in China, the China regulatory framework is now been pretty well established and we are seeing movement there and we would expect over the next few months to have service in China, in China aerospace.

Dick Ryan:

Okay. Thank you.

Operator:

Thank you. And our next question comes from Simon Flannery from Morgan Stanley. Your line is open.

Simon Flannery: Morgan Stanley:

Great. Thanks a lot. Good morning. You provided a little bit of update on the 2Ku installs schedule saying you would top 75 this year.

I think last year or last quarter you said you'd o around 300 planes next year. You have obviously built your backlog now so as can you just talk us through I think some of the bulk would be done by '19. Help us understand the pacing of these installs and how to, if I am British Airways, do I have to go to the back of the queue or can you actually increase instead of doing five per week you can do ten per week and what are the gating factors beyond the STCs to do that? Is there antenna issues or installed cruise or is it just getting those planes freed up if you could just give us help us understand how we model that thousand planes coming into the business over the next several years. Thanks.

Michael Small:

We can hire you on our install process. I think you named all the issues that you have to take on there to increase capacity. Yes as we tried to indicate in the press release, we are looking to go beyond the 75 this year and to accelerate next year. It’s clear that our backlog is growing and we need to higher production rate.

The STCs would get you to the starting lines but once into the starting line, you need to make sure the supply chain is there for all the various components. We are working that. The installation crews is perhaps the least of the challenges but we are getting that capacity in place too and then aircraft availability is the challenge for the airlines and you have to bring all three together. Our ability to be highly predictable to the airlines so only make the plan available we do it in the time allotted.

On the specific dates predetermined is very important to the airlines. So GOGO is investing heavily in this and we think our aircraft operations are ability to engineered certified install maintain aircraft is the unique capability and we don't think anybody else in the industry can install particularly in a retrofit basis the way we can.

Simon Flannery:

Okay. So I think you've said before that the 2Ku would really ramp through the year so is it more of the get through the heavy summer period and then as we enter the full that's when you really start cranking on the 2Ku installs.

Michael Small:

That's very fair and we so there is two getting items so really get before the fall one is the heavy flying season as I was just mentioned the aircraft aren't easily available particular in the international aircraft to get very difficult. Both and then we get the STCs are way and so we expect both those things to be cleared and so September timeframe is landed a good time for all.

Simon Flannery:

Okay interested. Just quick follow up on air to grand on that business aviation that was down a little bit is this a better a good run rate for the rest of the year or there any particular factors why it was off a little bit?

Norman Smagley:

There primary there is weakness industry wide a little bit in the aftermarket and business aviation. But no major factors competitively we still are extraordinarily strong in that market and we feel very good against our guidance in the side and point out the service revenue -- I mean here we are still adding enough lift there is almost the -- commercially aviation business aviation why there is could plan growth the ARPA growth has been extraordinary and ended up with the 41% service revenue growth for the second quarter in a row.

Simon Flannery:

Thanks, Michael.

Operator:

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

James Breen:William Blair:

Thanks for taking the question. Just one on the competitive front. I think there is somewhat of a broad expectation that Panasonic would be the winner in the BA deal and clearly wasn't. Can you just give us some thoughts on what you're seeing competitively outside the US and have players changed all and do you think you sort of distance yourselves from some of the other competition. Thanks.

Norman Smagley:

Thanks. Yes well we're thrilled with the IAG when along with Virgin Atlantic we now have a very strong foothold in Europe. We are seeing increasing in activity all around the world and we are now operating on four continents and airline engagement of the depth the discussions is increasing and we're liking our win rate and as 2Ku becomes more real as our aircraft operating, operations capabilities become more evident and the sophistication of our service platforms become more apparent. We think we're going to continue to do very well, continue to running up wins.

James Breen:

And just in general when you look at the fleets that you have won with them and some of the larger planes in some of the long whole routes what are your thoughts on the potential revenue from those relative to your base now. It seems as always to we start to skew the revenue per plane upward given the distance of the flights even assuming penetration you get little bit better from here as well.

Michael Small:

Yes. Those could be factors that are helpful but I think the single biggest factor that is helpful is all the planes being installed now or with 2Ku with incredibly more bandwidth and bandwidth equals to revenue in that lot more of -- more revenue and so I'm optimistic on that front. I'm also very optimistic that the area of the connected aircraft the more broadly -- connected aircraft and just to connect to passenger is upon us and we just publish our book about that and this available to anybody like a copy. But there is going to be lots of other revenues versus beyond just the passengers.

So lots of bandwidth increasing revenue sources those plane should do well in our rest of our base should do well too.

James Breen:

And I guess just lastly, as you talked the airlines and you sort of think about and instead of partner with them on monetizing the new services you putting. Is there a concept there that first class passengers start to see free Wi-Fi similar to hotel royalty program so forth where you could see some immediate revenue from the airlines for those types of passengers and then rest of it would pay as you go.

Michael Small:

I think that's exactly right. In fact, Japan airline they just launched 15 minute free program on lot their planes the airline pays for it and so why I do think business models will evolved in this industry. I think it happens more gradually with programs like drive for high value customers or for occasional sponsorships but some of the burden will be moving away from the passenger to other payers and at the same time the cost of the bandwidth is coming down and the amount of bandwidth available is going up so all those things are going to be very good for revenue on this business.

James Breen:

Great. Thank you.

Operator:

Thank you. And our next question comes from Andrew Degasperi from Macquarie Capital. Your line is open.

Andrew Degasperi: Macquarie Capital:

Great thanks. First question, I was sort on call press that Gogo was financing for international airlines. I was wondering can you give us maybe some more comment on that and how would you structure it and secondly are you concerned at all about the ARPA trajectory concerning the competition out there. Thanks.

Michael Small:

I'll let Norm take the XM and but the deal relationship is between the airline and XM and not us.

Norman Smagley:

That's right so we basically facilitate the work between the airline and Exim Bank. We are not actually directly involved in the transaction. So it doesn't really affect us at all, makes it easier for gives another source of financing for the airline. So something that always benefit for them.

Michael Small:

And on the ARPA trajectory I am extraordinarily optimistic about the ARPA trajectory. Bringing more bandwidth is going to ignite ARPAs as Norm mentioned in the script as 2Ku bandwidth falls in here international planes will have it from day one but the US planes some percentage of those will get on but then the rest of planes on the air to ground network are now on a less congested network because we offloaded so that's going to be very helpful and we're seeing tremendous ARPA growth in Business Aviation where the bandwidth is 20 for those sized aircraft and we're seeing 15% ARPA growth on the planes that have been in the network for a while the flat year-over-year due to the dilution of the new aircraft. So the underlying trend is good and the addition of more bandwidth is going to make it great.

Andrew Degasperi:

Great. Thank you.

Operator:

Thank you. And our next question comes from Andrew S with Wells Fargo. Your line if open.

Andrew S: Wells Fargo:

Michael I wanted to ask you about a comment you made earlier when you said that the satellite contracts don't have a big fixed cost component or are highly variable. I am just wondering are you structured like typical per pays where you are committing a certain amount and it ramps over the next few years or is it even more variable than that?

Michael Small:

No, you described the structure of the contracts. They are taking a pay. The reason is variable and in practices we haven't committed to a much higher run rate of expense than we incurred. To that end as we need more we can just dump contract for as the business grows.

Ultimately the business judgment is how much to buy and when. You don't want to be cut short in the near term on capacity you have to make sure it's available but in the long run this is a declining cost business on satellite capacity ultimately is a commodity with us and its going through a period of technological renaissance and how the innovation is happening and so we fully expect capacity cheaper in the future because the technology it's better and so we want to buy it overtime with just a reasonable amount of safety stock for the near term needs.

Andrew S:

Makes sense.

Michael Small:

And one transponder, once the business gets to scale once you have global coverage, you can actually buy in relatively small increments. It’s the fix fixed is getting started, getting global coverage before you have your first plane flying but after that it's really quite a variable expense for us.

Andrew S:

Got it. I think on the previous call or in other presentations, you talked about maybe outlining your future roadmap for the ATG network and relatively soon just wondering if there is any update on that or any changes in your thinking.

Michael Small:

Yes there are some changes in our thinking driven by two factors. One is the performance of 2Ku has been better than anticipated costs have been lower so 2Ku can take more burden. There will be smaller roll for air to ground but a very important role that will be for the smaller aircraft business aviation and the regional jets so first factor 2Ku doing really well. Second factor is there has been a delay in '14 G and it is still uncertain whether it will happen.

So we have been exploring alternatives and we are going to get, we are very close to bring to market those alternatives explaining to the market what those alternatives are and I think these alternatives will be lower cost in 14 G and can be implemented in more graceful way overtime so not only lower expense but not all of once. So we're getting close to making that disclosure on what our next-gen solution is.

Andrew S:

Got it. Thank you very much.

Operator:

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

Robert Manning:Evercore ISI:

Hi this Rob. In the context of bandwidth cost and competing directly with satellite providers could you discuss the difference between ownership economics and the ability to negotiate with various providers against each other and the economics per share infrastructure?

Michael Small:

Ownership economics are terrible. You've going to make a huge investment and point in time and - at last for 15 to 20 years as the superior alternative we preferred to have an open solutions. We put the most efficient antenna on the plane and then watch the satellite innovation happen and as each generation comes along we take advantage of the lower and lower costs. I would also point out that a high percentage of the cost structure in this business is in the aircraft operations and the platform services.

So you can have the satellite but you still going to do as -- to functions so you need a really, really good margin on a bits of your own the satellite if you are going to support the other things takes from this business. So I believer and I am quite confident we have just on the right path in open architecture and taking advantage of all the satellite opportunities out there. Not just at the moment where you have negotiating power if you can take advantage a lot of choices but overtime so you capture the innovation.

Robert Manning:

Great. Thank you.

Operator:

Thank you. Our next question comes from Phil Cusick with JPMorgan. Your line is open.

Phil Cusick:JPMorgan:

Hey thanks. Sort of under the same category, how do you think about the per bit difference between LEO and GEO and how does it change your model?

Michael Small:

So LEO advantage is per bit to some degree, but it's also lower --. Its less than the 1000 kilometers or 600 miles versus 22,000 plus miles above the area per GEO. So you've essentially taken the dispense latency to zero there by comparison and that's going to be the real advantage of LEO. The second advantage of LEO is because its closer antenna size and gets smaller you don't need stronger antenna or weak antenna because its satellite is closer.

So and that I would say the cost per bit potentially can be lower ultimately that will be determined by what each of those satellites costs I think there is lot of room in the current objective of what that industry is striving for. Sort of they can even miss their objectives and still have a bit advantage.

Our final advantage is LEO's is the intend congregate towards the pull and they actually have the strongest coverage in the polar regions. Our assumption is at least initially we are going to use both GEO and LEO when they get one of the LEO's first drive you don't switch very often between the two networks, but you would the time switch between the two networks and once again I know sound like a both of records but that's the advantage of our open architecture and the 2Ku antenna and as we said here today we are doing engineering work to make sure it can gracefully work across both the GEO and LEO constellation.

Phil Cusick:

Okay and under the header of what of you done from lately the IAG now that's great. But how should we think about your RFP pipeline today?

Michael Small:

So I think I just mentioned it's active house there the airlines don't know they have to get into this game and we are operational on all the continents where there is real activity and so I expect continued announcements this year and I do think very high percentage of the world’s leading airlines make decisions over the next couple of years.

Phil Cusick:

And how should we think about your cash and liquidity given the additional announcements.

Norman Smagley:

So we have over $300 million of cash on balance sheet. So obviously no -- in for cash. We have seen this as we talked about in the call big increasing demands for 2Ku. We talked about our goal to accelerate deployment.

So to run those plans through and to truly accelerate and adopt the increased demand for the 2Ku system sometime we will need some additional capital. But the key thing remember is as we invest in 2Ku deployment every dialogue was into that generates a very high return for us, creating a lot of shareholders value. So the first their and broader deployment that we can do it's really a good thing. for us.

So the bottom line is apparently there is a lot of business out there us to go get.

Phil Cusick:

Do you have capacity at the debt side or you think you would have to raise equity to do that?

Norman Smagley:

We think we can have all the markets that are open debt and equity.

Phil Cusick:

Got it. Thanks guys.

Operator:

Thank you and our next question comes from Carter Mansbach with Jupiter Wealth. Your line is opened.

Carter Mansbach: Jupiter Wealth:

Good morning gentlemen. Congrats on another solid quarter and really great work on IAG and Delta Ku orders. So my question is more not about numbers but more about sentiment. So Ku is clearly the next best thing but over the last few years.

As the Internet has become cumbersome, Gogo's legacy product has become sluggish. Clearly, there is a negative connotation around Gogo as a product. So my question is this, how will Gogo go about changing this sentiment? Would you guys do marketing campaign or will you allow the airlines to take over the word wifi on their planes and take the focus away from the Gogo name?

Michael Small:

So at this stage well some of what you describe currently and the airlines are branding more and more the connectivity on the plane and we are supporting it and I think the world understands that its powered by Gogo but in today's world your product is your brand and at the end of the day until we make it faster and meet the needs of the customer both airline and their passengers, we are going to have the reputation we currently have in the market place which I think you reasonably described. 2Ku is important and we get it out there we are bringing in more bandwidth we will bring the best solution to the market place so that we'll be no better choice than the Gogo solution and the gap between Gogo and ground will essentially will be gone with 2Ku we will replicate a ground like experience in the sky and that's what we need to do to make people love Gogo again.

Carter Mansbach:

Sure so as that rolls out do you see yourselves doing any type of branding campaign like this is not your Daddy's Gogo or something like that?

Michael Small:

I don't think you need to spend there is only one way you do is to make it real in the market place and deliver the bandwidth people want and then our customers will tweet, Facebook and let the world know that's literally how the world works these days and -- they don't think so doesn't help

Carter Mansbach:

Fair enough hey listen congrats on great a quarter. I look forward to speaking to you in the future.

Operator:

Thank you. Our next question comes from Andrew S with Wells Fargo. Your line is open.

Andrew S:

Mike I wanted to follow up on the comment you made about one of the benefits of the excess supplies is that you are able to get good pricing but that the owners economics right now are terrible for the satellite companies. One of your major providers is in pretty difficult financial shape and has already cut back on some of their investments. Your other providers primarily a video service provider and I think as they see the economics on these HDS investments they may not decide to continue to invest. And so on what you know -- you guys are clearly investing and if not, accelerating.

I'm wondering if you put in the investments into developing a Ku band antenna or a dual band antenna to protect yourself from any potential pullbacks from the Ku providers in the HTS space.

Michael Small:

First we have lot of confidence in the Ku ecosystem and in fact it's larger system and expect continued investments there and the satellites we'll continue to operate independent of any balance sheet issues out there in the industry. So to the second point on your comment, the end of day GOGO's just looking about to get the best service to the planes in the sky at the lowest cost from highest quality most reliable bits to the plane claim and we will do whatever it takes and go wherever that leads us.

Today we don't see a real benefit and spending a lot of money against our Ku solution but if it turns out for whatever reason that ecosystem gets going and has true global coverage and redundancy and all things we are looking for than we will up Ka. I don't see that as eminent but it’s something we will do and GOGO has gone from air to ground to satellite and back again and we take care of airlines we find the best capacity whatever it may be at any point in time.

Andrew S:

I appreciate the color. Thanks.

Operator:

Thank you and that was our final question. I would now turn the call back to Michael Small for any further remarks.

Michael Small:

Thank you everyone. The era of 2Ku is up and running and we couldn't be happier with the way it’s going. So thank you all for your time today and look forward to talking to you in the near future.

Operator:

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.