Gogo Inc.
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to your Q3 2017 Gogo Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder - I would now like to introduce your host for today's conference, Ms. Alva, Treasurer and VP of Investor Relations.

[Varvara Alva:]

Thank you. Good morning, everyone. Welcome to Gogo's third quarter earnings conference call. Joining me today to talk about our results are Michael Small, President and CEO; John Wade, Executive Vice President and COO; and Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this conference call. These risk factors are described in our earnings press release and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K and other documents we filed with the SEC. In addition, please note that the date of this conference call is November 2, 2017. Any forward-looking statements that we may make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measure in our third quarter earnings release. This call is being broadcast on the Internet and is available on the Investor Relations section of Gogo's website at ir.gogoair.com. The earnings press release is also available on our website. After managements' remarks, we'll host a Q&A session. And now, it's my great pleasure to turn it over to Michael.

[Michael Small:]

Thanks, Varvara. Good morning, everyone. Before I get into the details for the quarter and the progress we are making against our plan, I want to take a step back and provide some perspective on our business. Our rapid deployment of 2Ku is transformative. We will have much more to say about this, at our upcoming Investor Day on November 17, but at a high level, the increase in bandwidth transforms our offerings in several ways. First, it gives us the ability to vastly improve the customer experience, including very importantly across our North American networks. Second, it allows us to accelerate take rate growth through Gogo airline and third-party programs. And third, it positions us to begin offering new products and services. We are confident this transformation will accelerate revenue growth and drive long-term profitability. In fact, we are already seeing evidence of this in the form of increased take rates and improved ARPA on our satellite systems. We recognize that having great technology is not enough. We need to get that technology on planes quickly. To that end, we have made significant progress in improving our installation times and reducing installation cost. There is much work to do, but we have the right plan in place and our progress to date is substantial. With that, let me turn to our results. Revenue grew 17% to $173 million, fueled by strong service revenue growth in ROW and BA segments. Adjusted EBITDA for the quarter are $13 million, it was up $3 million sequentially, and it was impacted by $4.5 million in charges that Barry will discuss. We expect a significant ramp in adjusted EBITDA in Q4. Also, we added a $110 million of cash to the balance sheet, in anticipation of more airline wins as demand for 2Ku remains high. In Commercial Aviation, we continue to expand our market-leading position with key wins for 2Ku in North America and Rest of World. In North America, we announced a deal to install 2Ku on all of Alaska's aircrafts, including some win-backs on the Virgin America fleet. More recently, in ROW, we announced a deal with LATAM, the largest airline in South America. We now have more than 1,900 aircraft awards for 2Ku making it the most rapidly adopted broadband satellite in-flight connectivity solution in aviation history. 2Ku has been selected by four of the world's largest airlines and 14 overall. We are rapidly building critical mass around the globe. Operationally, we continue to set the industry standard in terms of speed for broadband satellite installations. We install 2Ku on 76 aircrafts in October, bringing year-to-date installs to over 320. We are on target to hit our installation guidance of 430 to 550 2Ku installs for the year. I am also pleased to report that our bandwidth per aircraft grew 47% in CA and 20% in BA year over year in the quarter, even with only 9% of our CA-NA flight equipped with satellite connectivity. Bandwidth growth will accelerate in 2018. By this time next year, not only will approximately a third of our CA-NA fleet have satellite connectivity, but our 100 megabit per second, next gen ATT network will be commercially available for the regional jet and BA market. This rapid migration to higher bandwidth for all aircraft types will result in the significant improvement in customer experience, a crucial factor in driving take rates and ARPA. We are already seeing this happen. Take-rates increase to 7.5% in CA-NA, up from 6.5% in Q3 of last year. Drivers of this take-rate increase include the recent fleet-wide launch of messaging pass with Delta, an expanded relationship with T-Mobile, and continued adoption of Alaska's messaging product. In September, we announced Gogo Vision Touch. Gogo Vision Touch brings Internet-enabled entertainment to the aircraft by leveraging our existing connectivity system to deliver content wirelessly to seat back screens. It is a cost effective lighter-weight option than what is available on the marketplace today. We are launching this product with Delta and have seen a very high level of interest from other airlines. We see Gogo Vision Touch redefining and disrupting IFE. To sum it up, the transformation brought by high bandwidth is real and incredibly exciting. It's still early days, but we're already seeing satellite-connected aircraft in North America generate far more ARPA than ATG aircraft. Annualized ARPA for a satellite-connected aircraft across both NA and ROW is about $220,000. Turning to Business Aviation, we had another outstanding quarter. Service revenue improved another 30% to reach $43 million for the quarter. We also launched a new connectivity platform for BA called AVANCE. From now on, you always talk about AVANCE L3 and L5 connectivity systems. They were previously talked Gogo Biz and Gogo Biz 4G. AVANCE is unified platform for in-flight experiences from streaming video and audio to on demand movies, personal smartphone use, real-time data apps for talkative and remote diagnostics and support. Before turn it over to John Wade, I want to leave you a few takeaways. Our dedicated aviation networks and aircraft connectivity systems are delivering industry leading and rapidly improving performance in terms of bandwidth coverage and availability in both DA and CA. This performance drives aircraft wins and an industry-leading space. Operationally, we are and we'll continue setting records for getting more aircraft online. Finally, we're engaging more passengers in CA and more customers in BA with more bandwidth and cutting-edge products and services. This combination of factors is already drives an increased take rates and positioning us to deliver improved profitability and long-term shareholder value. Now, I'd like to turn it over to our Chief Operating Officer, John Wade.

[John Wade:]

Thanks, Michael. During the quarter, we continue to ramp up 2Ku installed base in Commercial Aviation. In October, we installed 76 aircraft, from 50 in September, bringing totaled 2017 installed aircraft to 322. Our installation time is dropped about 36 hours. We are well positioned to hit our installed guidance [indiscernible] On the OEM side, we've now delivered three A350 aircraft to Delta with our 2Ku system already installed. We've continued to advance our Airbus OEM programs and expect to announce our first Commercial Aviation order to Airbus from time early in 2018. For Boeing, we expect the first B787 installation to take place around year end. We'll have our first Bombardier production installation delivery in May 28 for Delta. We're also progressing production installation satellite, Airbus and Boeing aircraft types, and targeting delivery in 2019. I'd also like to add more color to the Gogo Vision Touch product, as Michael mentioned earlier. Gogo Vision Touch evolved out of an airline need. Delta wanted a seat back solution without the weight, cost and complexity from legacy solutions. For Gogo, this amounted to a software centric add-on to our existing connectivity service. To allow us to Delta product visual engage even more passengers. This is how it works. Gogo Vision Touch puts commercial rate tablet supplied by Delta in the seat backs and Delta's new Bombardier C-series aircraft. The tablet modestly connects to the Gogo in-cabin network and can be pulled in and out for that the complexity of wide system, the simplicity and potential cost savings, why we're already seeing significant interest from other carriers. Turning now to Business Aviation. We have begun to shift our AVANCE L5 connectivity system, which we formally referred to as Gogo Biz 4G. The market assumption has been strong, and we have now sold 86 units. The AVANCE L5 system is recently selected as a factory option on Embraer Legacy 450 and Legacy 500 business jets as well as several key Dassault Aviation for aircraft. Recently, we also announced the addition of a global Ku band solution that will utilize a small satellite antenna for larger business aircraft and leverage our existing global Ku satellite network. We believe this product will give us access to new market, an excess of 2,000 aircraft. This solution combined with our 2Ku solution, gives Business Aviation to satellite connectivity products to serve the entire global Business Aviation market. Before, I turn it over to Barry, I'd like to highlight a couple of points. Our operational execution is industry-leading as evidenced by our aftermarket track record. We've made considerable progress with OEM delivery aircraft and we'll continue to accelerate our efforts. And our Business Aviation position and competitive strength of formidable advantages. In some, we see significant growth opportunities ahead, and we're already driving the execution necessary to capitalize on these opportunities to deliver value for our customers and shareholders. With that, I'd like to turn it over to Barry.

[Barry Rowan:]

Thank you, John, and good morning, everyone. We delivered another strong quarter of revenue growth. Service revenue was up 19% to $153 million and total revenue of $173 million was up 17% from the prior year. Service revenue grew across all three segments and was particularly strong in CA-ROW and BA, which grew 117% and 30% respectively. Adjusted EBITDA of $13 million was up $3 million sequentially, but lower than the prior year by $2 million. As expected, expenses related to airline launches and OEM programs did decline sequentially. In addition, this quarter, we incurred $4.5 million in charges related to write-downs of legacy product lines and retirement of Gogo rest aircraft. Excluding these charges, adjusted EBITDA was $17.5 million. The charges associated with legacy product lines included previously capitalized software and related inventory expenses, totaling about $3 million. We also decided to retire our test fleet

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Robert Gutman of Guggenheim. Your line is open, Robert.

[Robert Gutman:]

Thanks for taking the question. In terms of ROW ARPA dilution that you're expecting going forward from the new installations, what would be the magnitude there of the impact? And if you could provide us a little more detail on this tail-mounted high-throughput satellite antenna going on the business jets, how does that compare to the 2Ku antenna and how do you provide that level of throughput on a smaller antenna tail-mounted?

[Michael Small:]

Okay. We have Barry, he'll take the first question, and I'll take the second question.

[Barry Rowan:]

Yeah, thanks, Rob. I think it is worth reiterating that ARPA for ROW is very robust at $226,000. And in this quarter, it's about a quarter of the ROW aircraft including Virgin Atlantic and Goal [ph]. The dilution that we expect going forward is totally related to the new aircraft airlines coming online. So it will have a relatively meaningful impact overall. But I think it's important to look at the fact that we expect the ARPA for the existing aircraft to grow in a continuing double-digit rates throughout that period.

[Michael Small:]

And the reason it will grow next year is we're going to accelerate the rate of aircraft additions than Rest of World next year. It will be substantially higher than it was this year. And the second, on the tail-mount antenna, we are getting once again to do in BA what we did in the past with the ATG network. And we built the ATG network for the commercial business, and then had a very profitable opportunity to sell it into BA. And we have now built a global high-throughput satellite network for CA and we've also built a very sophisticated modem that's going into the marketplace right now. And so, bringing that high-throughput satellite network and that modem to the BA network, combined with a more standard tail-mount antenna, produces dramatically higher performance than anything that is yet been available in the Business Aviation market. We expect peak-speeds to consistently be at the 25 megabit per second level or better. And the business aviation market has not seen that kind of performance historically, that the quality of our coverage globally is tremendously strong since we already serve 98%-plus of the global commercial aviation flight hours. So there is going to be a powerful, powerful offering in the business aviation market.

[Robert Gutman:]

Great, thank you very much.

[Operator:]

Our next question comes from the line of Phil Cusick of JP Morgan.

[Philip Cusick:]

Hi, guys, thanks. You mentioned that the new $110 million, that's for anticipated wins. And we've seen fewer EMEA and APAC deals in the last year than I would have expected given your comments at the Analyst Day last year. Is this area of new potential or do you think there are more widespread deals?

[Michael Small:]

That is an area of potential, APAC and the Middle East. But that globally there are opportunities everywhere, including North America. So we - 2Ku is been extraordinarily well received as the leading solution in the marketplace. And our ability to install planes quickly is being recognized. So we think we will see - the funnel will be global. The reason we focus on Asia is we built a global network and we want a lot of aircraft flying on it everywhere, because it helps the utilization of the network. So there are a lot of planes in Asia and it's beneficial to us to get planes in that region. And I expect us still to be successful in signing in that region.

[Philip Cusick:]

If I can follow-up, can you talk about where your satellite capacity utilization is today? Where are we now versus 2016 and how does that track over the next year?

[Michael Small:]

We saw and - explain one of the reasons for the improvement in Rest of World EBITDA sequentially from second quarter to third quarter was the increased utilization of network. We didn't spend much more on satellite capacity, but we had some more incremental revenue. That trend will continue. The utilization is going to be best initially in North America and in Japan where we have good regional fleets under the satellites. It will improve materially in the Rest of World as we install substantially more Rest of World aircraft next year than this year. So there will be significant improvement during the course of next year.

[Philip Cusick:]

Thanks, Michael.

[Operator:]

Thank you. Our next question comes from the line of Simon Flannery of Morgan Stanley.

[Landon Park:]

Hi, yes, this is Landon Park on for Simon. Just talking about the CA-NA ARPA, are you able to provide a more specific apples-to-apples revenue uplift for your converted 2Ku planes?

[Michael Small:]

So we make a couple of comments and we improved our reporting by breaking out ARPA between ATG and satellite in North America. Those are our two fundamental networks and we think that's the right way to report and see that the ARPA is $220,000 for satellite and $125,000 annualized for ATG. That's a function of two things. One is larger aircraft get the satellite solution. That just makes sense that planes that fly over water and have more people to get the satellite. The planes that stay over land and fewer people get ATG. But there is also the benefit of the additional bandwidth that is helping the ARPA on the satellite aircraft. There will be mix issues as we do these conversions, which ones we put 2Ku on and when, so that number will have that factor in it for the next year or so. But more bandwidth translates into more revenue. We see in the Rest of World, we see it in the satellite aircraft to North America.

[Barry Rowan:]

And Landon, I would just add one point to what Michael said which is when you see the economics as we've now broken them out with ARPA of $220,000 for satellite that unit economics are very attractive at these levels. And if you think about that, across each of the segments for the BA segment, for the regional jets for example that will - that are larger than ATG. And for 2Ku, that the unit economics are very attractive even at these current ARPA levels, which is an important foundational element of our overall company economics.

[Landon Park:]

Are you able to provide a breakout between those two drivers or a specific uplift that 2Ku is providing on new installs for conversions?

[Michael Small:]

We are not providing that data. There is no good ongoing way to report that. We're reporting it in the sensible way by the two networks. And we will continue to make technological innovations that will drive bandwidth. On the ATG side, we have ATG and ATG4. You can't break, to break that out we don't. We have Ku and we have 2Ku. We are introducing the Gilat modem. It has a major impact. We're introducing high-throughput satellites. It has a major impact. This is we have improved our reporting and we think we've improved it in the way that is going to be most helpful to investors over the long-term, because it will be rapid technological innovation that drives bandwidth improvements.

[Landon Park:]

Great. Thank you very much.

[Operator:]

Our next question comes from the line of John Hodulik of UBS.

[Lisa Friedman:]

Hi, good morning. It's Lisa for John. Just a couple of questions, as far as the expanded T-Mobile relationship, can you tell us a little bit more about what that involves? How it's different than the prior relationship and whether you are still able to potentially make partnerships with other wireless carriers? And then, as far as the Gogo Vision Touch with Delta, does that have incremental impact of your revenues from Delta or was it already contemplated in your last negotiation of your relationship with them? Thanks.

[Michael Small:]

Yeah. So the expansion of the relationship is across several fronts, it's time, technology and service offerings, and we've over time increased the service offerings and who gets what among their customer base, and they now a bit more premium solution, where the best customers get a full flight solution. We're working our ways to make it easier to access the service, just simpler sign on. And we've expanded in terms of time of the durational contract. Now, on the Gogo Touch, the first deployment of that happens in the spring of next year as the first C-series is delivered. And so, it will be deployed, but, yes, there is a commercial relationship with some economics we're getting for Gogo that will begin to appear next year. It won't be a large number next year, simply due to the number of aircrafts that have it. But our ability to revolutionize in-flight entertainment make it lower cost per seat, get more modern screens in there, make it more upgradable over time, and make it more uniform from one aircraft type to the next, which airlines like. It's going to be a pretty big deal for the in-flight entertainment business. And it will result in revenue for Gogo over the long-term.

[Lisa Friedman:]

Okay. Thanks. Just one more, if I could. I think, there is some press coverage, Netflix working with a number of airlines that are your partners, and using new compression algorithms to help passengers air access Netflix with better experience. And just wondering, your involvement in that partnership and potentially could we see revenue uplift there as that increases bandwidth usage.

[Michael Small:]

Yeah. So, we love it when over-the-top content providers make it more efficient to screen their services. Netflix has always been a leader and adaptive compression techniques to make it, deliver a good quality video in a variable bandwidth environment. And they're taking it to the next level here, and we think that's great. With 2Ku streaming available for everybody on the plane, and this is only makes it better, just great technological advancement on their part.

[Lisa Friedman:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Louie DiPalma of William Blair.

[Louie DiPalma:]

Thank you. Good morning, Michael, Barry, John, and Varvara. Thanks for the satellite ARPA disclosure. But on the flip side to ARPA, I have a question regarding satellite bandwidth pricing and specifically Gogo's average satellite bandwidth cost per aircraft. Michael, on your prepared remarks you noted that bandwidth per aircraft in North America has increased by 46% and over the past two years for Gogo, bandwidth cost per aircraft has fallen from around $230,000 to around $160,000, as satellite aircraft online has more or less quadrupled. So in the context of like falling pricing per gigahertz and the increased efficiency or the increased utilization that Phil Cusick just referenced, I was wondering, if you could provide a long-term target range for satellite bandwidth cost per aircraft with the context of most of your 3,000 commercial fleet going to the satellite network.

[Michael Small:]

So, well, it's a good question, and that ultimately Gogo mission vision is to get highest quality bandwidth to the most aircraft everywhere at the lowest possible cost. And our open architecture to capture all the innovation that's happening, our open architecture to buy the bandwidth where we need it, when we need it, not being trapped into a big - it's all the way we drive our cost down over time. We are seeing rapid declines. We forecast rapid declines and then we repeatedly revise our forecast to lower and lower cost per bit over time. Those trends are powerful. And some of things that are happening to make that in very real terms what's driving it is that the 2Ku acceleration. So we're getting those on planes at a more rapid rate and there is more efficient cost per bit. We also in January SES-15 is scheduled to come online. That's our high throughput satellite over North America. It will address a very high percentage of our megabytes. That comes on in January, goes live. We'll optimize it during the first quarter, but that's going to change. We're deploying the Gilat modem, our new modem and at a pretty rapid rates. It's on about 50 planes today. That's a much more efficient modem, particularly on the reverse link. We're driving down our cost there. I would also say one of the ways to drive down cost is by simply scale. The more planes you have flying, the better you can utilize your capacity, and that's happening at a rapid rate. So this is what we're all about. It's getting more bandwidth, lower cost to aircraft. And it's all the trends are going in the right direction.

[Louie DiPalma:]

Great. And my second question concerns CapEx, Barry, can you provide more color as to what is in that non-success based CapEx bucket and is any of the non-success based CapEx one-time in nature.

[Barry Rowan:]

Yeah, the primary components of the non-success based CapEx have to do with the network costs overall for ATG and satellite network upgrades. So those are the primary drivers. We also invest in software. So those are really the primary elements. So that, in terms of, how we see that slowing over time, as we mentioned we expect to be at the low end of the cash CapEx guidance this year. And it's mostly due to those non-airborne equipment related expenses, but we're also seeing some improvement in the co-investment per aircraft as well.

[Louie DiPalma:]

Okay. And you previously earmarked approximately $50 million in CapEx for the development of the next generation ATG network. How much of that $50 million is expected to be incurred in 2017 versus 2018?

[Barry Rowan:]

The lion's share of that will be incurred in 2018, as you saw from the release about next-gen ATG, we're now testing that in the embedded test sites during this year. It will be rolled out pretty extensively in 2018 to the point that it will be commercially available there. So most of the expenditure will be in 2018 with some carry over into 2019.

[Louie DiPalma:]

Okay. And lastly, when - are you do the rough math regarding success-based CapEx and the number of 2Ku installations for this year. It comes out roughly $340,000 per aircraft. And I just wanted to know if that amount of like co-investment is still expected to decline in 2018 and 2019, and what are the factors behind the decline in the CapEx effect is actually happening?

[Barry Rowan:]

Yeah. First, though, your number is very high. And probably the major reason for that is, the CapEx this year includes. The equipment is actually installed on the aircraft as well as the inventory build ahead of the installations for next year. So that's a meaningful percentage of that. So you're all pretty substantially on the high-end. In terms of what brings that down is that we - our co-investment is declining. So there was more investment with some of the early airlines that we expect that to be lower going forward. We also see the ability to lower installation cost of the chipsets over time. So it's a combination of those factors that - as it starting substantially lower the net number and then continuing to reduce over the next several years.

[Louie DiPalma:]

Perfect. Thanks a lot, Barry, and thanks, everybody.

[Operator:]

Our next question comes from the line of Paul Penney of Northland Capital.

[Paul Penney:]

Good morning. Could you refresh on where you expect take rates and ARPS to trend into next year. And specifically, how much drag on price per session will come from the rollout texting on Delta?

[Michael Small:]

Yeah, so a couple comments on that, Paul. We are - we introduced texting at Delta, right at the start of the fourth quarter, and then you'll see a significant increase in take rates on the fourth quarter is result of that. You will also see a significant reduction and average revenue per session. If we've done this right, there shouldn't have a major impact on normal revenue trends. That's exactly how it rolls out, but it was fairly revenue neutral in the short run. We've switched strategy from mining, the current investor base - customer base, the business traveler for maximized yield, that's basically been our strategy for the last few years given the limited capacity. We're now trying to increase engagement. Given the 2Ku rollout, we're only partially through it, the only airline wide solutions, we can put in place today, we have some planes are ATG, and some planes are 2Ku, are the low bandwidth solutions like messaging. As a 2Ku rollout progresses, we will have more flexibility to introduce higher ARPA - ARPS offerings on a fleet wide basis. So we are quite simply, we're switching from maximizing yield, the business traveler segment, so the strategy that engages the entire aircraft and I'm very pleased with how that's going.

[Paul Penney:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Andrew Spinola of Wells Fargo.

[Andrew Spinola:]

Thank you. I was wondering, if you could just add a little additional color to the ARPA in North America this quarter. You mentioned before the hurricane, and I was wondering, how big on an impact that was. And also just any of the still other puts and takes is to sort of why that - what number is relative about this quarter?

[Michael Small:]

So, first, there was a seasonality is definitely a factor, and actually last year it was down ARPA and revenue from the second and third quarter that's been true most years. I've been here put greater magnitude this year. About a million or so of the greater magnitude is explained by the hurricanes. The rest of it is the reason I just explained instead of looking for price increases, where we could take them, which is what we've been doing in prior years, this year we focused on increasing engagement and introduce the messaging pass, and in fact, if anything took a few price decreases rather than increases against the business traveler base. So that explains it, the trend going forward, lots more bandwidth, lots more engagement, and we have a lot more people engaging and paying there's going to be a plenty of opportunity to create revenue and shareholder return out of that.

[Andrew Spinola:]

Understood. And then on the cost of services, wondering if you had any cost from AMC4 satellite that you procured in Q3?

[Michael Small:]

I will - I can't answer that question. I have to get back on that one.

[Andrew Spinola:]

Fair enough. And then, just last one on, just wanted to understand the second quarter - third quarter was look it usual on BA and then you pointed out that it's going to bounce back over 40 next year. I just wanted to drill down on specifically the equipment margin in that segment. It looks like it was artificially low this quarter, I just wondered if you can confirm that. And just help us understand what that margin is going to look like going forward. As you go after the turboprops and the international jets with the satellite antennas?

[Michael Small:]

Yeah, so the equipment margin was effected by the one phone, right after we have this quarter that we talked about, so that had a meaningful impact. As we look at it going forward, the equipment margin, we expect to kind of BA in the general ZIP code, where it has been. But as we are also introducing the lower end products to go after the turboprops and light jet markets in part of that strategy is to be able to offer lower upfront cost to those aircraft with very attractive ongoing revenue stream. So that will unfold over the next couple of years, as we move into that market. But in a very attractive unit economics in that market as well.

[Andrew Spinola:]

So just to confirm that - the entire $2.1 million with flow through cost of equipment in the quarter?

[Michael Small:]

Yes. That's correct.

[Andrew Spinola:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of [Brian Dennis of Cowen] [ph]

[Unidentified Analyst:]

Hey, good morning, guys. Thanks for taking my questions. Couple of things, if I'm looking at this correct, it looks like the year-over-year increase in take rates decelerated a little bit in the quarter versus 2Q and 1Q? Are there any one-time items driving this or how would you explain that?

[Barry Rowan:]

There are no material one-time, the - other than the seasonality take rates - yeah, it's - I don't think there is a big explanation. You will start seeing a material acceleration of take rates starting next quarter. And that will continue going forward. We are working to engage on a plane and simply what the Delta messaging pass hitting a huge number of aircraft. By the way that's available on every single one of their planes, a fleet of well over 1,100 aircraft globally. So that will make a big difference.

[Unidentified Analyst:]

Got it. And just one more, the stock has sold off, since you guys to tack on. We thought it was a positive move, but can you elaborate a little bit on the rationale behind it down the extra $100 million?

[Barry Rowan:]

Yeah, I mean, it's pretty obvious, it's been more than frustrating to see what's happen there. When there has been no negative news from the company during that period of time. I think, the reason - let me talk about the reason for the $100 million and then some observations about that. I mean, the reason that we took on the additional $100 million was an opportunity to do that in response to the strait of the sales pipeline, which is trending to at the high-end of our expectations, and to provide some additional cushion to our balance sheet. And so we are able to do that at a cost effective way as a yield towards was less than 8%. And we think, what happened is that we did that, we announced that additional financing, before we are able to announce the additional airline wins. So we had obviously announced Alaska prior to that, since then we have announced LATAM. So we do that those - we do that the pipeline was strong, as Michael already talked about. So I think that was a big part, I think, of what had happened, I think. Second observation is that, the transformative nature of 2Ku bandwidth is really not obvious yet in the market. I mean, it's coming out now and we're going to see the benefit of that for the reasons that we pointed out on this call. I guess, the final point I would make is that this really is an execution story to a large degree at this point that has to do with getting more planes online. So the installations that you saw are materializing as we had set the expectation they would and hope they would. And even, if you look at the October rate of 76, that's over 900 per year in terms of installation. So given that we can do that at every month with seasonal considerations, that positions us well to provide the 750 in installation capacity on an annualized basis. So at this stage, it really is about executing on getting those 2Ku planes in the air and getting the benefits from them. That's not yet been revealed. I mean, that's not yet been demonstrated obviously. That's all happening in the coming quarters.

[Operator:]

Thank you. Our next question comes from the line of Andrew DeGasperi of Macquarie. Your line is open.

[Andrew DeGasperi:]

Thanks. I joined the call late. So I'm not sure if you've already answered this. But how should we be thinking about in terms of aircraft counts for 2018, we include the American Airlines, potential de-installs? And then, secondly, at your Analyst Day last year, you mentioned that you saw demand for, in terms of throughput of satellite bandwidth that's around 70 gigabit per second. Just curious to know, given the new wins at Alaska and others, as well as the 2Ku uptake, do you feel that number is changed or do you think that's potentially a little stay [ph] at this point?

[Michael Small:]

On aircraft count, we have no way of knowing for sure the pace of de-installations that could occur at American. But at this stage, we would forecast a modest decrease in aircraft count in North America due to those de-installations next year, in 2018. But we expect to far more than offset that in Rest of World, significant acceleration there. And so on Gogo's overall aircraft count will increase next year at an appreciable rate. So we feel good about the net aircraft count. The bandwidth, we're still - our aircraft counts haven't really changed materially since we are looking out on the year ago. What has changed more is our optimism that we can - in reality that we can keep driving down the cost of bandwidth and the availability of bandwidth. So our bandwidth picture is substantially better than it was a year ago. And I think it's substantially better than we believe that competitive options are in the marketplace. Gogo will have the bandwidth, the highest quality bandwidth to the most planes at the best economics.

[Andrew DeGasperi:]

Great. Thanks, Michael.

[Operator:]

And we have a follow-up question from the line of Louie DiPalma of William Blair.

[Louie DiPalma:]

Hi, thanks for putting me back in the question queue. Given all the controversy over the ATG network in Europe, do you believe that validates how big of a competitive advantage your ATG network here is in the United States and particularly how that relates to your ability to serve the commercial regional jets?

[Michael Small:]

Yeah, so the ATG network is a huge competitive advantage for Gogo. And it's a much bigger advantage in North America. The geography is just inherently more friendly, it's more contiguous uniform. More aircrafts stay over land in North America than they do about anywhere else. It also happens to be true that two-thirds of the business jets in the world are in North America. And a very high percentage of the regional jets in the world are over North America. That we have - today, we serve over 1,000 regional jets and that's a really good business for us. And they never fly over water and the lower-cost overnight install of ATG is perfect for us. So, yes, ATG has a huge advantage for us and it's much more applicable in North America than it is any place else in the world.

[Louie DiPalma:]

And do you think that most or all of the regional jets that you currently serve with your current ATG network will be interested in upgrading to your next-gen network or is that mostly going to be a business aviation product?

[Michael Small:]

Now, I think they should be and I think they will be. Our current ATG network will get better as we offload to 2Ku. But it's still a 10 megabit per second peak-speed network. With next-gen ATG, we'll take it to 100 megabit per second peak-speed network. And it also has the benefit of further offloading ATG with next-gen ATG. So this is all good news. It's a low-cost overnight upgrade. So I'd be surprised if the RJ fleet in North America doesn't upgrade to next-gen. I do think it is applicable to the larger business jets. And I think the biggest competition to next-gen ATG on those business jets will be our global Ku solution. Right now, most global planes invest in a global solution, and then add our air-to-ground when they're in the U.S., because it's higher performing than the global solutions. But our new Ku solution for businesses can be pretty high performing. So we'll have to see whether those jets vote for both or satisfied just with the global solution.

[Louie DiPalma:]

Thanks.

[Operator:]

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Michael Small, CEO for closing remarks.

[Michael Small:]

Okay, thank you, operator. So I'd like to close, as I started, by saying that the bandwidth is rising and it will be transformational. I view this. And we are focusing as a company, as this is an executional story. We got to get those planes installed with the solutions we have. And that will result in what we've all been waiting for, is EBITDA to start growing. And I expect that to happen even in the fourth quarter and into next year and beyond. So thank you all.

[Operator:]

Ladies and gentlemen, and this does conclude the conference. You may now disconnect. Everyone, have a wonderful day.