Gogo Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the First Quarter 2023 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. You will then hear an automated message advising that your hand has been raised.

Operator

Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations, Will Davis.

Speaker 1

Thank you, Andrew, and good morning, everyone. Welcome to Gogo's Q1 2023 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO and Jesse Betchman, 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 In the future performance of the company, we caution you to consider the risk factors that could cause actual results to differ materially from those in the forward looking Statements on the conference call. Those risk factors are described in our earnings release filed this morning In a more fully detailed under Risk Factors in our Annual Report on Form 10 ks and 10 Q and other documents we have filed with the SEC.

Speaker 1

In addition, please note that the date of this conference call is May 3, 2023. Any forward looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of more information or future events. During the call, we will present both GAAP and non GAAP financial measures. We've included a reconciliation and explanation of adjustments and other considerations of our non GAAP measures to the most comparable GAAP measures in our 1st Quarter Earnings Release.

Speaker 1

This call is being broadcast on the Internet and available on the Investor Relations website at at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q and A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.

Speaker 2

Thanks, Will, and good morning, everyone. Thanks for joining us today. I'll focus my remarks on 3 main areas. First, I'll provide a state of the business aviation industry as seen from Gogo. 2nd, I'll provide key highlights of Gogo's Q1 results.

Speaker 2

And third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jesse will then walk through our quarterly performance and 2023 outlook before we open up the call to your questions. So let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre pandemic period, Driving excellent new installation numbers for Gogo, which we expect will translate into high margin current service revenue, The primary driver of Gogo's long term value creation model. Though dealers and OEMs are still navigating some supply chain and labor lows, The avionics industry is in the midst of a return to normal operations, though at higher levels as I noted a moment ago and with some bumps still in the road.

Speaker 2

For Gogo, that means dealers are returning to normal order patterns. Due to the extended lead times induced by COVID In fear that supply may not be available at all, many dealers ordered more equipment than they had immediate need for over the past 2 years, culminating with our record setting Q4 2022 shipments. Fortunately for Gogo, our great production ops team was able to meet that demand. However, as lead times have come down, dealers can use current inventory for new orders and don't immediately need to backfill for those installs, which is why despite having our 2nd best new install quarter ever, We do not have as much equipment revenue to show for those installs as we normally would. We've seen this movie before.

Speaker 2

After a very strong Q4 in 2020, we suffered a 30% decline in equipment revenue in Q1 2021, Only to finish 2021 with very strong private revenue growth for the year. We also saw this in 20 nineteen-twenty. Regardless, We're confident that our record 2022 shipments will translate into strong activations in 2023. According to our dealers and OEMs, 75% of Gogo inventory in the channel now has either a named customer or an aircraft serial number associated with it. As for the rest of the inventory, we expect demand to take care of that.

Speaker 2

However, we're also launching some dealer incentives to Help that process along and we're working with some of our smaller dealers to shorten install times so that they can sell Gogo as a standalone outside of a large maintenance event. We've had some great success thus far and have brought standalone upgrade install times down to 5 to 7 dealers with 5 to 7 days with some dealers and are on track to get advanced upgrades times down to 3 days on some models with another dealer. In general, the larger dealers are extremely busy. The elevated flight activity that started with COVID is accelerating the pace at which Planes need to get in for required inspections and maintenance events. Many charter and fractional fleets literally have planes parked on the tarmac grounded until they can get into the shop for maintenance.

Speaker 2

Meanwhile, dealers continue to suffer labor shortages and some parts shortages. For Gogo, this has translated into more opportunities for dealers to install our equipment, but that's been tempered by dealers sometimes not having enough workers Trends temporarily impacted our AOL count in the Q1. The first is the higher level of maintenance events. Most owners turn off their Gogo service while they are in the shop or grounded on the tarmac waiting to get into the shop. The second is the increase in secondhand aircraft inventory.

Speaker 2

Though still well below the historical average of 5.6% of the U. S. Fleet, there's been a big jump in used Craft for sale this year from around 2.5% to 3.6% of the fleet, which impacts our AOL because customers typically turn off their Wi Fi when they park the aircraft for sale. However, those sales are also an opportunity as the new owners usually reactivate their service and often upgrade before the plane comes back into service. Taking a step back, Gogo's installed base is evidence of both our strong market position today as well as the immense opportunity we see ahead.

Speaker 2

Of the 15,000 business jets in the North America in the North American market, almost 50% of them have a Gogo IFC system installed today, of which almost half are installed with Avance. Avance is a perfect stepping stone for high performance oriented customers with easy upgrade paths to either 5 gs or GBB as they both utilize the same advanced infrastructure on the airplane, making it easier and cheaper to stay with Gogo and upgrade than to move those competitors' products. For this reason, the continuing to expand Avance penetration is a cornerstone of our strategy. Meanwhile, based on our research, the rest of our customers, that's non Evance, are generally satisfied with their current Gogo Classic product, which will continue to benefit from improvements to our ATG network. Our loyal installed base provides a solid financial foundation for our business for years to come.

Speaker 2

And the other 50% of the business jet segment and the highly unpenetrated 10,000 aircraft turboprop market Represent an opportunity for future growth. So let's move to our Q1 performance. The message is that despite some bumpiness as the industry returns to pre COVID patterns, we had our 2nd best new install quarter ever In our best first quarter installs ever. We delivered 1st quarter revenue of $98,600,000 up 6% over prior year, driven by record service revenue, our primary value driver. The impacts on our equipment revenue were most significant in January and February, but in March shipments were back on track.

Speaker 2

April was much better than January February, but still a little off track. So we feel we're on the right trajectory, but still have wood to chop to get back unflained. Our operating metrics for the quarter were strong, With twice as many customers upgrading services downgrading and continuing strong aircraft retention rates of greater than 90%. On the bottom line, Gogo delivered 1st quarter adjusted EBITDA of $39,700,000 down 7% year over year, reflecting softer equipment revenue as we just discussed and increased spending on our strategic initiatives, which Jesse will discuss in a moment. As for guidance, the factors I discussed in my Business Aviation State of the Union persist.

Speaker 2

However, we believe we're poised for strong performance in the second half, especially given the pent up demand we see for Gogo 5 gs. And we still expect to finish the year in line with the full year 2023 revenue, adjusted EBITDA and free cash flow guidance we reiterated this morning. Now let's turn to the drivers of Business Aviation demand. The underlying secular trends driving demand for Business Aviation Connectivity remains And continue to support our growth runway. 1st, passengers who flew commercial but could afford private aviation tried flying private during COVID and have generally not gone back to commercial.

Speaker 2

Many have now ordered their own jet or a fractional interest in the jet. 2nd, the demographic of passengers is going through a shift to a younger generation that expects high quality Internet connectivity wherever it goes. And last, almost all passengers went through a technology transformation during COVID, as we all lived in isolation and had to master heavy data These trends Drove a 137% increase in data usage across our networks between pre COVID Q1 2019 In Q1 2023 and a 79% increase in usage per hour over the same period. Though flight counts are not a revenue driver for our business, industry observers use that as a proxy for demand. Our Gogo fleet flights in Q1 were about even with prior year, but up approximately 30% compared to Q1 2019, which represents significant growth in the overall market.

Speaker 2

Additionally, Wall Street analysts project OEM Jet deliveries will hit 700 this year, up from 565 3 years ago and with currently committed purchases will grow to almost 800 Our OEM relationships are very important to us and Avance is either standard or an option on all 29 models of aircraft currently in production. This is a huge advantage for us as we launch 5 gs and GBB as they are merely extensions of systems that are already certified and installable Now let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our 3 pronged strategy. First, we want to expand our service addressable market by broadening the advanced platform product offering and adding networks to meet the needs of each segment of the BA market globally. 2nd, We want to drive customer loyalty by continually improving our networks and leveraging the Avance platform to provide easy upgrade paths as new technologies emerge. And third, we'll offer the best product and the best service to each segment of the market at the lowest total cost of ownership.

Speaker 2

We're making great strides in our strategic initiatives to achieve those goals, including our 5 gs network, Our GBV LEO offering, our FCC replacement program and the numerous operating initiatives I discussed on the last call. So let me start with our Gogo 5 gs system. We remain on budget and on track for commercial launch in the Q4 of this year. Once live, our 5 gs network is expected to deliver speeds roughly 5 times to 10 times faster than Gogo's current ATG networks, At peak speeds up to 25 to 30 times faster, enabling multiple streaming sessions and video conference applications to be opened at the same time on the same aircraft, and all at a lower cost than competing satellite solutions. In the meantime, customers who want Gogo 5 gs service Can install the Avance L5 system today with full 5 gs provisions and operate on Gogo's 4 gs network until the 5 gs X3 box is available.

Speaker 2

Once the X3 is ready, it can be installed quickly and 5 gs service can begin immediately, saving downtime and expense. We're extremely pleased by the market's excitement for Gogo 5 gs, evidenced by our pre provisioning momentum. We delivered 52 pre provisioned chipsets To customers in Q1, we have 116 end customers that have signed up for pre provisioning promotions and we have 98 dealer purchase orders in house. We also have order commitments from 4 OEMs and are in discussions with several others. We have STCs in process for 20 aircraft models representing roughly half of the business jets in North America.

Speaker 2

Now turning to our LEO based global broadband initiative, which adds an electronically steerable antenna to the Avance platform And add the OneWeb low earth orbit satellite constellation to our network offerings. LEOs are particularly well suited to Business Aviation Because their low altitude enables an equivalent link budget with less power than with GEO satellites, thereby enabling global coverage with Small antennas that fit better on most business aviation aircraft. Our goals for the global broadband offering are to 1st, Expand our total addressable market to include 14,000 business aircraft registered outside of North America, most of which have no access to broadband connectivity today. 2nd, to add a satellite feature for the 1,000 of U. S.

Speaker 2

Super mid and heavy jets to fly global missions that have Gogo advanced ATG installed for use over North America today And third, drive enhanced stickiness in our core North American medium sized smaller aircraft segments By offering an easy path to add a LEO product if they desire more capacity. We expect GBB We'll enable streaming directly from your favorite video services, multiple simultaneous video conferencing sessions, VPN access and all the We continue to make great progress alongside our partners. OneWeb will supply the LEO network, complete launch of its 588 satellite global constellation in April and is on track to have the network deployed in Aero ready in 2024 as expected. We completed preliminary design review in February with Hughes, our partner on the antenna side, and are currently on track to deliver GBB commercially 2 months ahead of schedule Our GBB product has received a very enthusiastic response from our OEMs, These are partners and fleet managers, and we hope to have some exciting news on that front in the not so distant future. Now let me talk about a couple of competitive advantages of GBB.

Speaker 2

First, our small form factor antenna It's designed to work on all size aircraft, while our only current LEO competitor is trying to deliver a very large antenna that will work best in the already very competitive heavy jet segment of the market. 2nd, Gogo offers much better customer service in a very small, a complex and service sensitive market. And 3rd, Gogo will be the only in flight connectivity provider that can deliver a combination of LEO and Leading ATG Services, enabled by our unique advanced multi bearer capability. Together, The combination of Gogo 5 gs and GBB will deliver a truly unparalleled experience for passengers using heavy data applications like Zoom or gaming, offering a unique performance advantage over competitors by virtue of our proprietary ATG spectrum and technology. Importantly, we're well positioned to leverage our existing international footprint to support GBBE customers outside the U.

Speaker 2

S. The 20 plus dealers already in place and 900 narrowband customers in 90 countries today.

Speaker 3

Before turning

Speaker 2

it over to Jesse, I'd like to provide an update on our SEC reimbursement program. Last summer, Gogo was awarded a $334,000,000 grant under the Federal Communications Commission's Secure and Trusted Communications Networks Program It would reimburse the company for expenses associated with accelerating the removal of Chinese telecom technology from its 3 gs and 4 gs networks. Because there were more qualified grants than originally planned, all grants were cut back to 39% of the original award, which in Gogo's case is $132,000,000 Legislation with bipartisan support has just been introduced that would Fully fund the program that grants awarded by the FCC, and we are hopeful that that will be approved. Because the functionality of replacing ground based equipment will be better than the equipment installed on our 3 gs and 4 gs networks today, Gogo will get some significant benefits from this network refresh, including a 40% improvement in connectivity performance for Avance L3 customers and almost doubling the number of aircraft the network can simultaneously hand. Jesse will provide some directional guidance on the expected financial impact of this program, which is not yet reflected in our guidance in which we will address on our Q2 earnings call.

Speaker 2

Jesse will also provide more detail on our recent $100,000,000 debt pay down and our Moody's upgrade. I will just state that we are committed to using our capital wisely. While returning capital to shareholders remains a priority given the current interest rate environment And that our interest rate hedge will come down by $125,000,000 in July, we thought it was most prudent to reduce our leverage at the current time. Overall, we're excited about the future and believe Gogo has the right strategy in place to continue to capitalize on the significant opportunity and deliver long term value creation. We're confident that our fundamental business model provides a strong foundation to support the strategic and operational initiatives we have underway and that our investment strategy continues to support our release of free cash flow in 2025 and beyond.

Speaker 2

And now I'll turn it to Jessie for the numbers.

Speaker 4

Thanks, Oak, and good morning, everyone. Gogo continues to generate strong financial performance Even as we've undertaken significant strategic investments like Gogo 5 gs and our global broadband product or GBB. This is a true testament to the strength of our underlying business model and financial position. In my remarks today, I'll start by walking through Gogo's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet and capital allocation strategy, including the pay down of debt We executed today and I'll finish up with some additional comments on our 2023 and long term outlook.

Speaker 4

Total revenue of $98,600,000 in the Q1 grew 6% year over year. Our top line was driven by record Service revenue of $78,500,000 up 11% year over year and 1% sequentially. Our ATG aircraft online reached a record 7,046 units as of the end of the first quarter, representing 8% growth versus the prior year and 2% growth sequentially. Advanced Units Online We did 3,447 units, up 28% year over year and now comprise 49% of our total fleet. We expect our Advanced Aircraft Online growth rate to accelerate in the coming months as dealers resolve staffing challenges that are contributing to slower installation rates and more of the equipment we shipped at the end of last year is brought online.

Speaker 4

We continue to expect the primary service Revenue growth driver to be from additional aircraft online as we execute in a global market that is only 22% penetrated year over year to $3,389 driven by recurring revenue and higher priced service plans. The launch of Zuvo 5 gs in Q4 this year, followed by our GBB product in the second half of twenty twenty four, Our catalysts to further expand our ARPU growth opportunity over time. Moving to equipment, Gogo delivered $20,100,000 in equipment revenue in the Q1, a 9% decrease year over year and 35% decrease sequentially from the seasonally high and record 4th quarter. We shipped 223 Advanced Units this quarter, down 9% year over year and down 43% sequentially, reflecting standard seasonality for our business That was particularly pronounced due to record shipments in the second half of last year as well as the normalization towards pre pandemic order dynamics that Oak had discussed. We remain confident that the strong secular underlying drivers of IFC demand and our Strong position in an underpenetrated VA market will continue to propel our equipment sales in the future.

Speaker 4

We ended the quarter with a strong backlog and about half of our expected 2023 equipment revenue budget already secured. Overall, we're expecting our 2023 top line performance to skew towards the second half of the year with stronger activations and shipments in the 3rd and fourth Now turning to profitability. Gogo delivered strong service margins of 79% in the Q1, consistent with the prior year period and slightly above our budget, driven by lower network costs. We continue to expect Long term service margins in the 75 plus percent range and to be the primary lever for free cash flow generation and long term value creation. Equipment margins were 10% in the 1st quarter, 26 percentage points lower than the prior year period and 22 percentage points lower sequentially.

Speaker 4

The decrease in our equipment margin was primarily due to additional costs related to the FCC reimbursement program and increased production costs driven by our expected 5 gs launch in the Q4. As Oak described, we have determined to participate in the FCC reimbursement And by doing this, we incurred $1,300,000 in inventory write off costs. In addition, We incurred $1,000,000 in costs this quarter, replacing a large number of EBITDA Air Cards in advanced equipped aircraft with dual modem

Speaker 5

Air Cards.

Speaker 4

These FCC related costs drove down equipment margins by 12 percentage points. We expect equipment margins to go back to plan levels in the 25% to 30% range in the quarters ahead. Now moving on to operating expenses. 1st quarter combined engineering, design and development, sales and marketing and general and administrative expenses increased 15% year over year to $29,000,000 and on a sequential basis, operating expenses were flat. The year over year increase Reflects development expenses for GBB as well as higher personnel costs.

Speaker 4

As we previously stated, We expect that 2023 2024 will continue to be investment years as we complete our 5 gs program and ramp up spending for GBB. We continue to anticipate that these investments will support sustained strong top line growth and once completed In terms of Gogo 5 gs spending, we continue to stay on track and on budget for Gogo's 5 gs's commercial launch in the Q4 of 2023. While our time line has shifted, we have remained on track with the cost expectations we set back in 2019 that Gogo 5 gs and external development and deployment costs Would be approximately $100,000,000 In the Q1, our $2,600,000 of 5 gs spending It's comprised of $2,200,000 in CapEx and $400,000 in OpEx. Now on to our GBB initiative. In the Q1, Gogo incurred $1,500,000 in operating expenses related to GVB.

Speaker 4

We continue to expect external development costs for GBB to be less than $50,000,000 over 3 years, Approximately $14,000,000 in 2023 and the remaining spending to occur in 2024. As we previously stated, We anticipate that approximately 95% of GBB external development costs will be in OpEx. This spending profile is reflected in our 2023 adjusted EBITDA and free cash flow guidance. Moving on to our bottom line. Gogo's 1st quarter adjusted EBITDA decreased 7% year over year to $39,700,000 primarily due to lower equipment revenues and increased operating expenses, including GBB.

Speaker 4

Gogo delivered net income of 20 point $4,000,000 in the Q1, down 8% year over year, translating to $0.16 in basic earnings per share and $0.15 in diluted earnings per share. As a reminder, our financial statements reflect non cash income tax expenses as we continue to generate positive pre tax income. Based on our substantial NOL position, We do not expect to pay meaningful cash taxes for an extended period, but we may pay a modest amount by the end of our planning horizon. We continue to expect additional reversals of portions of our valuation allowance against deferred tax assets within the 2023 fiscal year. In the Q1, we generated $20,000,000 in free cash flow, up $11,200,000 compared to Q1 2022 Due to a decrease in networking capital from lower accounts receivable and lower 5 gs CapEx, free cash flow was down $5,000,000 sequentially, primarily driven by employee bonus payments made in the Q1.

Speaker 4

Now, I'll turn to a discussion on our balance sheet. We ended the quarter with $712,300,000 in outstanding principal on our term loan and $188,000,000 in cash and short term investments with our $100,000,000 revolver remaining undrawn. At the end of the quarter, Gogo had a net leverage of 3.1 times, in line with our target range of 2.5 times to 3.5 times. As we announced on May 1, Gogo made a strategic decision to pay down an aggregate principal amount of $100,000,000 on our outstanding term loan debt facility. As mentioned on previous calls, while we have a hedge agreement in place And before the pay down, we were more than 90% hedged.

Speaker 4

The first step down to $525,000,000 will occur in July. The pay down will materially reduce our interest expense, minimizing our exposure to the current volatile financial environment and ultimately strengthen our financial and strategic flexibility. As a result of the pay down, Google will reduce its Term Loan B outstanding principal to $612,300,000 Gross leverage at the end of Q1 was 4.2 times and it will be reduced to 3.6 times after the pay down. On an annualized basis, we expect to reduce Cash interest by approximately $8,500,000 based on current SOPR rate. And in 2023, interest costs will be reduced by approximately $4,500,000 based on the April forward SOPRA curve and $50,000,000 net of foregone interest income.

Speaker 4

As a result of executing a more conservative financial policy with a lower leverage target and pay down of debt, this week Moody's Our credit rating to B1 with a stable outlook. The pay down of our debt is in line with our balanced capital allocation strategy. As a reminder, our priorities are: 1st, to maintain adequate liquidity 2nd, investing in strategic opportunities to drive competitive positioning and financial value, including 5 gs and GBB third, maintaining an appropriate level of leverage The economic environment with a target net leverage ratio of 2.5 to 3.5 times and finally, returning capital to shareholders as appropriate in the future. Now I'll turn to our outlook. Gogo is reiterating our fiscal 2023 financial guidance and long term targets.

Speaker 4

We continue to target 2023 revenue in the range of $440,000,000 to $455,000,000 While we've had a slower start to 2023 due to the dynamics Oak discussed earlier, we continue to believe 2023 will be a strong year for aircraft online growth As the record units we shipped in 2023 are activated, driving recurring high margin service revenue and equipment Additional equipment sales follow, particularly in the second half of the year. We expect 2023 adjusted EBITDA In the range of $150,000,000 to $160,000,000 reflecting operating expenses of approximately $30,000,000 for strategic and operational initiatives, including $9,000,000 in expected 5 gs spending, which reflects the shift of $6,000,000 from 2022 to 2023 Related to the chip delay, approximately $14,000,000 of GBP development spend and approximately $7,000,000 in additional operational initiatives Focused on penetrating the 78% of the global business aviation in flight connectivity market that remains untapped and maintaining our long term competitiveness. We expect 2023 free cash flow of $80,000,000 to $90,000,000 which Includes capital expenditures of approximately $30,000,000 to $40,000,000 of which $20,000,000 is tied to Gogo 5 gs. Even with our investments in exciting new products, we expect year over year free cash flow growth in 2023 of nearly 50% at the midpoint of the guidance.

Speaker 4

Importantly, our 2023 guidance does not reflect the impact of Golar's participation in the SEC's Secure and Trusted Communications Networks' reimbursement program. As previously mentioned, Gogo plans to proceed with the SEC program by submitting an initial reimbursement request before the July deadline. Since the program is currently partially funded, We have some optionality in what we request reimbursement for that could impact where grant money received will be recorded between the income statement and balance sheet. We will be solidifying our plans over the next couple of months, but in the interim, I want to provide some directional context on how the reimbursement program could impact our 2023 outlook. At a high level, we expect 123 free cash flow To be impacted by increased use of working capital as we build airborne inventory in tower equipment, the government reimbursements Partially lag those purchases and then we see a cash flow benefit in subsequent years as the program unfolds.

Speaker 4

We will update our guidance on our Q2 call to reflect the program once our plans are finalized and provide more complete information on the financial impact of the SEC Our long term targets also remain unchanged, reflecting our expectations for the launch of Gogo 5 gs in late 2023 and the launch of our GBB product in the second half of twenty twenty four. We reiterate that we expect revenue growth at a compound annual growth rate of approximately 17% from 2022 Through 2027 with global broadband materially contributing to revenue in 2025. We also expect annual adjusted EBITDA margin to be in the mid-forty percent range by 2027, which includes continued investments In Engineering Design and Development to fund innovation and market competitiveness in the out years. And finally, we continue to expect Free cash flow of more than $200,000,000 in 2025 and growing in 2026 and beyond. We believe that our value proposition is underpinned by the Strong growth in free cash flow as we complete our 5 gs and GBP investments and execute in an underpenetrated global market.

Speaker 4

Gogo's business continues to perform extremely well. Our outlook underscores the immense value creation potential for our customers and shareholders that we expect to unlock as we execute our strategy and invest in the strategic initiatives that will extend and enhance our long term growth. Before we open the call up for questions, I would like to thank the entire Gogo team for their continuous hard work and dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We are now ready to take our first question.

Operator

Thank you. Your first question comes from the line of Ric Prentiss with Raymond James.

Speaker 2

Thanks. Good morning,

Speaker 6

everybody. Hey, good morning. Couple of questions, if I could. First, Oak, you started with, obviously, the state of the business, Mentioning 15,000 business jets out there, you guys have about 50% of that 50% are avant. Help people understand why do you think that market is so under penetrated?

Speaker 6

You talked a little bit about the technology changes and Demographic shifts, but help people understand how you think that current plays out of what drives people to say, yes, I want in flight connectivity On that pool of business jets and then on the 10,000 turbojets sticking with the U. S, what is it there? Does it require price? Is it an Tana, what is it that gets turbojets to come on board? And then the third part of the question is, obviously, the global side of it.

Speaker 6

What do you think Spurs people to come to say, yes, I'm ready to pay for in flight connectivity.

Speaker 2

Right. So we'll start with the jet. 50%, given that this has been line fit for, I don't know, roughly 10 years or so, I would say, isn't that bad when you think about it. A lot of the jets are frankly older Then significantly older than the amount of time that this has been our service has been line fit available at the OEMs. So all that has to come through the aftermarket.

Speaker 2

And frankly, I think that service levels have to do with it. I think that the incredible increase in the capacity we'll be delivering with 5 gs and GBB, etcetera, will It'd be a real incentive for people to install service. 2nd, you have to do it. Generally, it's taken a long time to install. Our systems are faster installed than others, but still probably haven't been fast enough.

Speaker 2

So we've been really focused on reducing install times, so that you not only have to Wait for you don't have to wait for a big maintenance event. You might even just go in and do a standalone upgrade install rather. I'd say in the lower end of the business jet market, there's some price sensitivity, but that's where we've got L3 positioned and Lower price plans that go with that. So I think that's why we've been pretty successful in driving penetration of the light jet market over the last couple of years. So it's a combination of all those things, it's generational.

Speaker 2

I mean, a lot of business jets, 5, 10 years ago are owned by people my age and Many of those people didn't want to have connectivity on the jet or feel a need for it. That's really shifted as today. I think we did a poll of our user base Last year, 67% of them are now Gen X, Y and Z, not baby boogers like myself. So I think those are all contributing factors. I think we've seen a real turn there and a much a real acceleration of the number of people Installing.

Speaker 2

So that's that market. In the turboprop market, I think it's a couple of things. I think price is definitely a factor And a lot of that market, and again, we've been trying to go down market. We've announced some deals with some of the turboprop Fractionals for instance, we've got our CERUS deal, which is actually not a comparable profit to a small jet, but sort of same market in some ways. But what we're seeing is more interest in the from the turboprop market, especially the charter part of that market People expect connectivity when they charter.

Speaker 2

So I think that that is going to shift. And of course, with Avance, we've been designing New form factors that are smaller and will fit in those more compact aircraft. So I think we have high hopes for that market. It's not going to be a high ARPU market, but it's a large market, so we make it up with quantity. And then overseas, the real issue is that most Aircraft don't have an option today.

Speaker 2

Of the 14,000 business aircraft outside the United States, 3 ish are heavy jets, and they have an option. They have a geosatellite option. And about Less than a third of those have that service today and that's I think largely related to expense. It's very expensive to install And very high service costs. So in that part of the market, I think cost will be an issue and sort of ease of install.

Speaker 2

And I think our RGBB product is well positioned for that. And then in the medium sized jets on down, there's nothing overseas that they can really use. There's the EAN, ATG network in Europe, but that's really not been sold to Business Aviation. And I think I don't know all the reasons why they haven't done that, but they haven't. So there's really not much of an option.

Speaker 2

The good news about GBB is its small form factor And competitive pricing will enable people to fit BBB on all those aircraft. So we think that's going to be a great opportunity for us.

Speaker 6

Great. That's very helpful to help people kind of frame it. And I think Jesse mentioned that GBV could be material in 2025. Is that kind of the hopes then is that GBB opens up and unlocks that 14,000 global opportunity that haven't had the Availability before and that's why and what does material kind of can you give us a hint of what immaterial might mean in 2025?

Speaker 2

I am not in charge of the definition of material, so I'll let Jesse deal with that. But We're looking to commercially launch the GBB antenna and network in the Q4 Of 2024, so you can imagine installs starting to hit now at the end of 'twenty four and going into 'twenty five. So that's I think while we say material and we'll start getting service revenue really in 2025 on that. Yes. Yes.

Speaker 2

Okay. So Still going

Speaker 4

to be heavily weighted beyond the equipment side, but you'll start getting some service revenue.

Speaker 6

Great. Last one for me, and of course, I love service revenue guidance rather than just Total revenue guidance, I do think the overall values of the company is going to be more driven by service than the one time equipment revenue. But the final one, $100,000,000 debt pay down, that sounds nice to get the debt reduced as the hedge kind of comes down for a step down. How much cash do you think you need on hand to run the business, Particularly as you look at maybe the working capital pressure with the FCC program, and then remind us of what the other step downs on the hedge are as far as timing.

Speaker 4

Yes. So, I mean, in terms of the cash that we would like to have on hand, as a reminder, we have the $100,000,000 So we always have that, but somewhere between $50,000,000 to $75,000,000 we'd like to be a little bit more And making sure that we have that cash on hand and especially as you noted, with some inventory requirements with FCC initially We get the reimbursements back from the government. So there could be a small lag in that initially. And with regards to the hedge pay down, we've got the 125 Paydown that happens in July of this year, and then the next paydown is, in December of 2024, so it goes from $525,000,000 down to $350,000,000 and then it will step down to 2.50 In terms of what's hedged, it will step down to 250, December of 2025 and then December 2026 down to 200.

Speaker 6

Great. That helps a lot. All right. Thanks, everybody. Stay well.

Speaker 2

Thanks, Rick. Thanks, Rick.

Operator

Thank you. And Our next question comes from the line of Phil Cusick with JPMorgan.

Speaker 7

Hi, guys. Thanks. Just a couple of follow ups on Rick's questions. And maybe talk about the long poles to launch the GVB network. Any update on OneWeb's progress there?

Speaker 7

And what else has to happen for you to get that Up and launched in 24, what are the big pieces? And you talked about what the alternatives are today, but what are the alternatives It look like they're coming down the line. Who else is working on products for Global Private Aircraft? Thanks. Yes, sure.

Speaker 2

So the long there's 2 long poles. 1 is the OneWeb network. They've launched now all the satellites they need to complete Their global network, they do have, I think, another 2 launches, but those are all spare satellites. So But they need to provide our services actually in space. They need to position those satellites now in their orbital planes and Get them up and operational.

Speaker 2

I think that they will and there's some software changes they make for ARO. So that will I'll get done, I think, by the middle of next year. And I think that will be a slightly shorter pole than the other one, Which is our building of our terminal, our aircraft terminal, which we're doing with Hughes. That program is in great shape. I have to say, working with Hughes is a real pleasure.

Speaker 2

Their operational maturity and program maturity is outstanding. And so we've been able to actually move that project in. It was going to be a early 2025 delivery and now we're into the Q4 of 2024. Let's move to the left and I think we see frankly some opportunity perhaps to even move it in a little more. So that's going extremely well.

Speaker 2

I'm not going to give away any secrets, but we're going to have some fun news about that at EBACE in Geneva at the end of May, the big Global Business Aviation Convention. So

Speaker 6

those are the those

Speaker 2

are really the 2 poles and I think both are in very good shape at the moment. In terms of alternatives right now, I think StarLink would be the main one. They have a large antenna today, 39 inches long, 31 inches wide, which is quite large for business aviation. That's installed on some Embraer 145s flying for JSX Airlines and on some G650s, which I believe are all pretty much owned by some Muscgonity or another. They've been seemingly having difficulty getting STCs for that.

Speaker 2

And They're certainly making closing progress trying to get into the market. Personally, I think that We have great respect for Starlink and the people at SpaceX. They're literally a group of rocket scientists. But we think That we'll be very competitive with them in our market. With our combination of ATG and LEO, Frankly, we think we're going to have the best product in the market.

Speaker 2

When it comes to return link, we'll be much better than they are and Other factors I won't bore you with in terms of the geeky stuff, but we think we'll have a very competitive product. We'll have much better service In a market that is very complex and very service sensitive and very demanding of service. So that's good. And I think that on pricing, we'll be very So, we think we can compete effectively with them. And then I guess the third point I'd make is coming into this market Makes no sense for them.

Speaker 2

They're a great company. They do Some things extremely well, obviously, on the satellite side. But when it comes to markets, they generally do it 2 ways. 1, They have a very standardized offering and going after a very large markets, like direct to home And it's relatively simple on the service side and the Musk marketing just Aura is enough to sell that product. And so that works well for them and they do it at real scale and they get costs way, way down.

Speaker 2

But they have to manufacture millions of terminals and the like to actually have the cost come down to where they need it. The other thing they do really well is really large customized programs like for the Department of Defense and the like and their deals are worth 1,000,000 and it's worth them committing huge teams of geniuses to build those programs and deliver them. What doesn't really make sense is, adding getting into markets that require that are very small and require lots of customization and cost. And I'm not sure they're really good at that. When it comes to the antenna, they're trying to try and take a consumer grade antenna and beef it up for That doesn't really work in aero, okay.

Speaker 2

It's got to be a ruggedized aero standard manufactured Piece of equipment, which is a lot different than what you can put on a home, right? It's the same with routers, the same with every single component of what they have. The level of customization, for a very small number of units doesn't make sense. The level of service that you have to have For a very small number of units, it doesn't really make sense either. So I think and if they come in and they dramatically cut Pricing, they're going to take a $300,000,000 or $400,000,000 service market today and make it $150,000,000 service revenue market.

Speaker 2

That doesn't really make sense because that's a rounding error in their numbers. So anyhow, that's our take on them. And then I think Satcom Direct has a deal with OneWeb as well as we do. We don't See a lot of progress from them in that front. They seem to be pushing some of their other products more heavily, but I mean, I think we always have to take them seriously.

Speaker 2

They're a good competitor. So I think that's kind of the competitive landscape.

Speaker 7

That's helpful. Thanks, Eric.

Operator

Thank you. And our next question comes from the line of Landon Park with Morgan Stanley.

Speaker 3

Great. Good morning, everyone. Thanks for taking the questions. Good. I was wondering if we could start on the OEM side.

Speaker 3

I'm wondering if maybe you could comment on what kind of take rates you guys have been seeing Out of that channel and maybe how that's trended over the last couple of years, and any early indications you've had from them regarding GBV, Just what the outlook looks like there? And then separately, I was just wondering if you could talk about what the EBITDA cadence might through the year given that the 1Q level was already at sort of the high end of your guidance. It seemed to include some on time expenses. So How should we think about the puts and takes through the rest of the year there?

Speaker 2

Sure. So I'll take the OEM part and leave Jesse, with the hard numbers part on EBITDA. Our take rates are Very widely by OEM, I would say. We have very high take rates at the Textron's and OEMs and Embraer's today, Less so at Gulfstream coming out of line 5th for instance, but we often get put in, in the aftermarket there, Same with Bombardier, Desso. So, it's a little hard to say exactly what the take rate is because often they're installed sort of Just after it comes off the line in a service center or something like that.

Speaker 2

However, I think that The way to think about it, about 65% of OEM deliveries stay in the United Date something like that and so we're kind of limited to that side of the opportunity if you will. And We would be on almost all Textron planes delivered to that market, very high percentage of Embraer's And then less so, like I just said, on the Gulfstreams and Bombardier's and the cells. However, we have very high penetration of the Bombardier Gulfstreams and DSOs. But again, that generally comes in the aftermarket. I would say our tank rates have been growing, which is Good.

Speaker 2

And then I would say that on GBB, the receptivity is just outstanding. And I've never seen the OEMs as excited as I see them now about that.

Speaker 4

Yes. In terms of the EBITDA for the rest of the year, so definitely the revenue is going to be higher on the second half of the year than the first half This is only $1,500,000 and 5 gs expenses is only $400,000 So both for 5 gs and GBB, those expenses are going to be picking up, as well as the other operational initiative expenses. So that will have some impact on the EBITDA going forward while the revenue is growing.

Speaker 3

Understood. That's very helpful. And then just to follow-up on the OEM side of it, maybe just including The aftermarket installs that come shortly after delivery, what of those 700 with the 65% in the U. S, Is it nearing 90 plus percent in terms of what you guys can get off of that? And just maybe more broadly, are you Hey, anything on the macro side?

Speaker 3

Have you picked up any customer sensitivity or anything along those lines?

Speaker 2

We haven't shared the attachment rates at the OEMs. We can contemplate sharing those in the future. Okay. So I'm not going to give you exact numbers. But like I said, if you first of all, right today, we are limited to those that are being delivered in the U.

Speaker 2

S. I'm going to give you a little wrinkle, which is sometimes those that are ordered overseas do install our equipment, but they don't activate it and they install it in order to have a Get better pricing in the aftermarket when they go to sell that air. So they think they have our product in and sell better. So There's a little bit of a wrinkle there. But I think that if you look at Textron deliveries in the U.

Speaker 2

S, We're probably close to 90%, something like that. If you look at Global Gulfstream, it's going to be at the other end. It's going to be sort of 20%. And so then And because of it sometimes in the aftermarket, at Lisa, if it's a relatively new Gulfstream, it's going to be at a Gulfstream aftermarket facility generally. We don't look at that, I would say, as a Line fit OEM install.

Speaker 2

So we don't really count it that way. So let us contemplate whether we'll share that in the future, Landon, but I think I've given you the color.

Speaker 3

That's very helpful. Is there anything on the macro that you would

Speaker 2

When you say macro, you mean macro economy?

Speaker 3

Yes, the macro environment.

Speaker 2

How it impacts people's feelings? Well, it's on people's minds. We did a little poll of our dealer advisory council and some road shows to dealers. And so in all, I would say, let's call that 12 to 15 dealers and only one mentioned the economy being the issue. There are a lot of other things that got mentioned that Might be might ultimately be economic, but we're more, I would say, micro in reality.

Speaker 2

There's been no real impact on orders at the OEMs, right, Will? I mean, they continue to be strong. And From the dealer perspective, they're busier than they can really handle right now, catching up on maintenance from COVID times. I mean, there are literally planes parked on tarmacs that can't fly because they're no longer in compliance on their maintenance logs. And They're trying to get that work done so those planes can start flying again.

Speaker 2

So everybody is very, very busy. So I don't think the macro economy has really hurt the market.

Speaker 3

Great. Thanks so much for taking my questions.

Speaker 1

Thanks, Landon.

Operator

Thank you. And our next question comes from the line of Lance Vitanza with TD Cowen.

Speaker 8

Thanks guys for taking the question.

Speaker 3

And maybe just

Speaker 8

to say with the theme of the dealers and the shipments and activations and the turbulence there, I think The concern is that it does raise the specter of perhaps the macro pressures are Kind of bleeding into the business jet demand. But just to be clear, it sounds like really what happened is that the dealers requested a lot of shipments Historically, because the lead times have become concerning and now that's reversing. And it doesn't sound like the underlying kind of final demand has Changed much. Is that fair? And I think you said, if anything, it's stronger than pre COVID and presumably it's also stronger than where it was before the supply chain Sort of got challenging.

Speaker 8

Is that fair?

Speaker 2

Yes. I think that's all fair. We had a Huge Q3 and Q4 shipments, record breaking. Some of that I think was driven by the still COVID ordering patterns, I think also our equipment prices go up every January 1st. So I think people were loading up Ahead of time on equipment before the price increases kicked in.

Speaker 2

So, and I think that they bought enough inventory to last them well into this And they don't need to backfill, but they're taken off the shelf to install if they've got already got plenty of inventory So I think that's the real impact right now. The important thing to us is getting the gear on the plane and activated and producing service revenue because As Rick pointed out earlier, that's the real golden egg here. So we're happy with that. And And a little inside baseball, we had a really good activation quarter. It doesn't show so much in AOL because When people go into maintenance, where they put the aircraft up for sale, they often almost always suspend the service for a couple of months or However, as long it takes to sell the jet.

Speaker 2

So there's a little dampening there because those sale activities have picked up in the last year And the maintenance activities are kicking up.

Speaker 4

So temporary.

Speaker 2

But that's all temporary, right? Most of those the ones that go for sale almost all come back online Often with an upgrade, which we like, and the ones that go into the shop, they turn it back on as they come out of

Speaker 7

the shop.

Speaker 2

So And obviously, if they're grounded waiting to get in the shop, they're really not going to they're really going to turn it off. I guess they don't want to sit there paying megabits they're not using. So those tend to dampen AOL, but we had good demand on the install side and activation side. And so we feel pretty good about that. The issue we found a couple of times is this plane is meant to come in for 2 months.

Speaker 2

It's going to get all the following things done. And the deal would be I want to sell them an IFC system. However, if I do, Because of my labor issues, I got to add 2 weeks to the 2 months and the customer won't accept that extension to the maintenance window. So those are the types of things that do dampen things a little bit. But like I said, it was our 2nd best activation month ever quarter ever and Certainly, our best first quarter activation.

Speaker 8

Great. Thanks. Thanks, Hope. Appreciate it.

Operator

Thank you. And our next question comes from the line of Louie DiPalma with William Blair.

Speaker 2

Hey, Louie.

Speaker 5

Jesse and Will, good morning. And Jesse, congrats on your first call as CFO. Thank you. Oak, you provided several metrics for the 5 gs pre Provisioning, what are the next technical milestones to look for with the 5 gs launch? And is there a risk that the launch could

Speaker 2

Well, we're on track right now, in terms of getting the chip Fabrication completed at Samsung and getting that chip to GPT Airspan and us on schedule. That looks to all be on schedule. We've done almost all the testing one needs to do on this system already, but We have not tested anything that just relates to the 5 gs chip. So clearly, that testing has to take place, which will happen generally late Q2, early Q3. We'll be Flying it in the Q3.

Speaker 2

There's always the black swan Possibility that something goes crazy at Samsung again or whatever, but with the amount of attention Samsung On Airspan, GCT and we have all paid to this chip at this point. It would be shocking if there was a problem with it. So we're quite confident we'll be Delivering in Q4, but now it appears to be completely on schedule.

Speaker 5

Excellent. And Oak, you also discussed how the 5 gs service is expected to be 5 times to 10 times Faster than your current Avance ATG product. And as it relates to Small and midsize aircraft that only fly in the U. S, I know you were just talking about Textron aircraft, but do you think that those aircraft, the small and midsized aircraft Would be good candidates for the global broadband product or do you think that for It's small and midsized aircraft that only fly within the U. S.

Speaker 5

That most likely they will stick with your ATG products as that appears to be fast enough for most of their needs as it relates to streaming or Video gaming and phone calls and whatnot.

Speaker 2

Yes, that's 100% right, Louie. And I think also it will be priced to appeal to that market. So, I think that ATG, if the mission is generally U. S, It's a very good answer. And 5 gs is a very good answer.

Speaker 2

So that's where we're positioning that product. The GVB product we're really positioning for obviously the international planes that fly outside the U. S. Most of the time. For heavy jets in the U.

Speaker 2

S. That fly outside the U. S. Often enough to want to have a system that can handle that overseas. In that market today, we've already got like in the heavy jet market, we're over 50% of the U.

Speaker 2

S. Heavies Have our system our ATG system on it today, probably about half of the heavy the super mids have our system on them today. And a lot of those are advanced already. So for them to add a GBB, it's going to be a pretty heavy pretty easy lift And it can replace their current GEO satellite products. Often they have us and the GEO product.

Speaker 2

So a lot of that market looks at this and says, I'd really love to have one throat to spangle, one provider, and one price for the bundled package that I You know, pay one bill. And I think that the LEO will provide better service than GEO. So, that market that's the other market where GBB is really in.

Speaker 5

Great. And one last one for Jesse. Will there be a material Step up in recurring cost of service expenses with the launch of 5 gs this year and the global broadband Networks, next year, like will there be like significantly higher like backhaul costs and tower expenses And other data center software fees that we should be thinking about. I know Oak and Jesse, you've previously Outlined expectations for significant margin expansion. And I'm just wondering What types of additional costs we should be thinking about?

Speaker 4

So 5 gs backhaul, it's in our guidance and it's in our long term forecast that we've been providing. So there will be some increase in the 5 gs backhaul. And as mentioned with GBB, we're paying by the drink On that with OneWeb, so that would be flowing through cost of service as well. But we still expect the margins to be in the 75 plus percent range In the long term, so that's included all in our plans.

Speaker 5

Great. Thanks, Jesse. Thanks, Oak and Well.

Speaker 2

Thanks, Louie. Thank you.

Operator

Thank you. I would now like to turn the call back over to Vice President of Investor Relations, Will Davis for any closing remarks.

Speaker 1

Thank you everyone for joining our Q1 earnings call. This now concludes our call and you may disconnect.

Speaker 2

Thank you.

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Gogo Q1 2023
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