Gogo Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Gogo Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please note that today's conference is being recorded.

Operator

I will now hand the conference over to your speaker host, Will Davis, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Olivia, and good morning, everyone. Welcome to Gogo's Q4 2023 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO and Jesse Betjeman, 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 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.

Speaker 1

Those risk factors are described in our earnings release filed this morning and are more fully detailed under Risk Factors in our annual report on 10 ks and 10 Q and other documents that we have filed with the SEC. In addition, please note that the date of this conference call is February 28, 2024. 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.

Speaker 1

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 Q4 earnings release. The call is being broadcast on the Internet and available on the Investor Relations website 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, everybody. 2023 was a busy year for Gogo. We continued to grow our high margin service revenue and to drive Gogo's strong cash flows propelled by accelerating adoption of Gogo's Avance platform and fueled by strong business aviation demand for connectivity. At the same time, we're making great strides in our investments to future proof our business by extending the technology frontier in aviation with Gogo 5 gs and our low earth orbit satellite product Gogo Galileo. We believe these new technologies will deliver order of magnitude improvements in the speed of Gogo service, that they'll increase our total addressable market by about 60% and that they'll extend customer lifetimes by providing easy upgrade paths for existing advanced customers.

Speaker 2

With the addition of Gogo 5 gs and Galileo, Gogo will have the most complete product portfolio in the business aviation IFC industry, with products that offer the right performance, the right coverage, at the right total cost, with great customer support for every segment of the highly unpenetrated 39,000 aircraft global business aviation market. We also navigated temporary aviation industry headwinds related to parts and labor shortages and busy maintenance schedules. And though those continue to impact our OEM and dealer partners, we are seeing suspension intervals starting to shorten and reactivation rates starting to pick up, which will hopefully help boost aircraft online this year. Despite the delay in the development of our Gogo 5 gs chip, the market continues to respond enthusiastically to the 5 gs value proposition with ongoing pre provisioning programs and a flood of STC programs that we believe position us for a highly successful launch late this year. And on top of that, we're executing the SEC Secured Networks Program, the support from the U.

Speaker 2

S. Government to enhance the security of our nation's infrastructure and at the same time deliver meaningful benefits to Gogo's network and growth trajectory. As Jeffy will describe in a moment, based on our new long term forecast, we're bullish on Vogo's opportunity for significant growth and long term value creation. Today, we serve a highly unpenetrated market with 76% of the world's 39,000 business aircraft flying without a broadband solution and demand for connectivity in those aircraft growing dramatically from both passengers and operators. As a result of these trends, we expect global broadband connectivity penetration across all business aircraft to grow from 24% today to the mid-thirty percent range by the end of our 5 year planning horizon.

Speaker 2

Over that horizon, we expect Gogo's share of global installed aircraft to remain at roughly 75% with our North American share remaining in the low 80s and Gogo's rest of world share growing from 0% today to the high 20% range by 2028, which equates roughly to 600 aircraft. To be conservative in our go go projections, we've assumed that StarLink achieves its currently published FTC schedule and launches a smaller antenna in the next 2 years. And for planning purposes, we projected as Galileo and StarLink come online, Sheryl will shift away from today's geostationary satellite incumbents and then Gogo and StarLink will benefit from that shift. And though we have to muscle through a tough investment year to deliver 5 gs in GALILEO, driven by strong recurring service revenue that drives strong cash flow and a strong balance sheet, which acts as a flywheel to drive investment in further enhancing our products and further securing our competitive advantage in the future. Now I'll highlight some demand trends and provide an overview of our Q4 results before I dive more deeply into progress in our strategic initiatives.

Speaker 2

Demand for WiFi and aircraft continues to grow. Data consumption per flight hour in Q4 was once again up 15% compared to prior year and up 74% from Q4 2019, demonstrating a step change in passenger expectations for in flight connectivity. Demographic trends bode very well for connectivity penetration. So all ages want better in flight connectivity, demand for connectivity increases as the age of the flyer decreases. GoPro equipped BA 2023 flight counts were down 2% versus 2022, but the gap narrowed to 0.5% in Q4 and actually turned the corner and knocked a 2% increase in January over prior year, which certainly signals demand for in flight connectivity remaining strong I'm sorry for flight remains strong.

Speaker 2

More importantly, flights are significantly elevated from pre COVID levels, with Q4 up 28% from Q4 2019 signaling to many industry observers that stronger private aviation demand is here to stay, which is further supported by strong OEM order books and very strong fractional sales, which we expect will drive Gogo shipment growth over the next few years. Now let me turn to our Q4 performance. Revenue was down roughly 10% from our record Q4 2022 performance, which was driven by a 2022 post COVID surge in equipment orders. On the positive side, we achieved record service revenue in the quarter, driven by record total advanced activations, which were up 20% from prior quarter and 15% from prior year, driven by accelerating reactivations and record upgrades from Classic to the Advanced platform. At the end of Q4, we reached 7,205 ATG aircraft online, representing 55 incremental ATG units in the quarter and reached 3,976 advanced aircraft online, representing 192 incremental advanced units in the quarter, up 21% from prior year and now representing 55% of our installed base.

Speaker 2

We view every addition of an advanced unit, whether a new customer or an upgrade to be a strategic win for Gogo, because it extends the lifetime value of that customer. That's because once an Advanced platform product is installed, it is far easier and cheaper for a customer to upgrade to new technologies such as 5 gs and LEO satellite connectivity with Gogo then moving to a competitor's product to upgrade that technology. The reason for that is generally the only work inside the aircraft to upgrade to a new technology with AVANCE is to add or replace an antenna on the outside of the aircraft. The rest of the upgrade can be achieved on the AVANCE box inside the aircraft with a simple software upgrade. This gives Gogo a huge advantage in our distribution channels Because Avance is already line fit on every currently produced make and model of aircraft, OEMs have lower engineering and line fit cut in expense when they adopt 5 gs or Galileo than a new product from one of our competitors, because they have already engineered and choose their production for the go go equipment that goes inside the aircraft.

Speaker 2

On the dealer side, because there are already STCs for Avance and all makes and models of business aircraft, they can upgrade their STCs or field approvals far more quickly than doing whole new designs for competitive products. And on the fleet front, if they have AVANCE installed, they can invest in one set of AVANCE hardware inside the aircraft and then upgrade incrementally by adding antennas at far lower cost than replacing full systems. To give an example of where we think this will work to our advantage, today there are more than 2,100 heavy jets flying with Gogo ATG connectivity in North America, many of which also utilize geostationary satellite products when they fly outside North America. Today, 61% of those have Avance installed, providing an easy path to upgrade from Jio to LEO connectivity when they so desire. We believe this advantage will only grow as we migrate the 3,200 customers still in our classic ATG products to the Avance platform as part of our FCC Secure Networks Program customer conversion campaign.

Speaker 2

Moving from service revenue to equipment, those shipments paled compared to our blockbuster year last year. 2023 was our 2nd highest advanced shipment year ever, which we believe portends more good things for the strategic customer reasons I mentioned a moment ago. And finally, given the strong activations last year, Gogo inventory in the field normalized and we're now down to roughly 180 units in the field that are not committed to a particular buyer, of which only 37 are at dealers that do not regularly move large amounts of inventory. On the earnings side for the quarter, despite our revenue headwinds, EBITDA came in higher than planned and free cash flow set a new record, which demonstrates the durability of our business model. I'm proud of the Gogo team and want to thank them for their commitment to our strategy and strong execution throughout 2023.

Speaker 2

Now for our progress on our strategic initiatives. Gogo is focused on accelerating growth with a 3 pronged strategy. 1st, we want to expand our addressable market globally by expanding outside North America and developing products and pricing that fit every segment of the 39,000 aircraft global market. 2nd, we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide an easy upgrade path as new technologies emerge. And 3rd, we're focused on offering the best product and customer support to each segment of the market at the lowest total cost of ownership.

Speaker 2

And we're making great strides on our strategic initiatives to achieve these goals. Let me start with 5 gs. I'll begin with a little bit of bad news, which is that due to a non technical contractual issue between sub suppliers, we've had a slip in our 5 gs delivery from Q3 to Q4 of this year. However, we believe that issue has been resolved and we are back in fabrication mode on the chip. Despite the shift in timing, we're really encouraged by the commercial certification progress we're making bringing this product to market.

Speaker 2

And we've already shipped 198 5 gs pre provision kits with NV13 5 gs antennas, 59 of which have already been installed and are flying today on our 4 gs network with an L5 4 gs box. Once our chip is ready, we will start shipping the LX5 box to those customers. And because the LX5 and L5 have the same form factor, they can make a quick swap and begin 5 service and 5 gs service immediately, saving downtime and expense. We have orders from 5 OEMs, one of which is already line fit installing the MB-13s and we have stock orders for 46 systems from our dealer network. On the certification front, we have 31 STCs in work, representing 41 aircraft models and more than 9,700 North American Jets.

Speaker 2

Of those, 10 SDCs have already been completed for the MB-thirteen antennas. And because the LX-five is the same form factor as the L5, will be quickly upgraded once we ship them the LX5 boxes with the 5 gs chip inside. The other 21 programs are awaiting the LX5 before completing work, which again because they are the same form factor is a relatively modest effort. We also hit an exciting milestone in this month when we received our first FPGA version of the 5 gs chip and began testing the 5 gs chip software in our Chicago lab. We're excited to bring Gogo 5 gs to market and with mean speeds around 25 megabits per second and peak to 75 to 80 megabits per second, we believe it's the perfect product for midsize and smaller business aircraft that fly North American missions and want great connectivity at a better value than competitive satellite products.

Speaker 2

Galileo. Let me turn to our LEO based global broadband initiative. Galileo comes in 2 versions, a smaller HDX terminal and a larger FDX terminal. The Galileo HDX terminal is a small antenna that fits on almost all business aircraft and targets A, the almost 12,000 midsize and smaller jets that domicile outside North America and have absolutely no broadband solution today. And B, those jets out of the 11,000 midsize and smaller jets that domicile inside North America that often fly international missions.

Speaker 2

The Galileo FDX terminal is a larger antenna that delivers significantly higher bandwidth and targets the roughly seven 1,000 global super midsized and larger heavy jets that fly transcontinental missions. For Galileo, peak speeds and mean speeds will be in close proximity with HDX delivering speeds to the aircraft in the high 50 megabit per second range and FDX delivering speeds close to 200 megabits per second, which is comparable to the speed StarLink publishes for its 39 inches antenna. As I mentioned earlier, a huge advantage for us is that Galileo is a simple upgrade from any AVANCE installed plane One only needs to add our HDX or FDX antenna on the fuselage and then run data and power cabling into the aircraft. As I also mentioned earlier, given that Avance is already a line fit option at every OEM and has STCs on every currently produced model of aircraft, it will be relatively easy from an engineering and certification perspective for OEMs and dealers to offer Galileo as an option to their customers. We've already signed one line fit agreement and have discussions underway with several others and 6 Gogo dealers have already either verbally committed or under MOU for 10 SDCs representing 28 different aircraft models and a global TAM of 8,000 aircraft.

Speaker 2

We remain on track to start shipping HDX terminals in Q4 and HDX terminals in the first half of twenty twenty five. We hit an exciting milestone this month when we received the first fully constructed prototype of the Gogo Galileo HDX antenna, which marks a significant step in design validation, preparing for flight tests this summer. With that, we're one step closer to our goal of offering a global broadband connectivity solution for every business aircraft everywhere. Now let me turn to the SEC Secured Networks Program. You'll recall that 2 years ago, Gogo was awarded a 334 $1,000,000 grant under this program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our 4 gs network.

Speaker 2

Because there were more qualified grants than originally planned, funding for all grants were cut back to 39% of the original award, which in Gogo's case was a cut back to $132,000,000 As we mentioned last quarter, the White House included full funding for the program in its supplemental funding request to Congress last year. Given that full funding has broad bipartisan support in Congress, we feel that it has a chance of passage this year. Partial funding will cover about 70% of our reimbursable cost of replacing all EVDO ground equipment and moving Gogo Class customers to advanced equipment that is compatible with the replacement ground equipment. And that is what we are projecting in the long term guidance we shared today. Based on changes we've made to our evolution program, we no longer believe we will need nor would we receive $334,000,000 However, if full funding is approved, we would be able to accelerate our program and cover all reimbursable costs.

Speaker 2

On the customer side of this transition, our goal is to convert all 3,200 tails still flying with our Classic product today to new LRUs with LTE air cards over the next 2 years. And we are funding very attractive conversion rebate plans to encourage them to do so. We've been in conversations with more than 95% of these customers. So far, 55% have indicated a preference with the overwhelming majority leaning towards an advanced upgrade and almost half of those choosing L5s or L3s. This program has considerable benefits for Gogo and its customers, including a 40% improvement in connectivity performance for Avance L3 customers, a doubling of the number of aircraft that the ATG4 gs network can simultaneously manage and an acceleration of Gogo Classic customers upgrading to Avance, which has the strategic benefit of extending Gogo customer lifetimes due to the ease of upgrade to 5 gs and Galileo and other new technologies I described a few moments ago.

Speaker 2

Perhaps the biggest news in the quarter was announced after the quarter was over and that is the 10 year extension of our 20 year relationship with NetJets. NetJets is by far the largest operator of business jets in the world, with roughly 600 aircraft in North America, which they plan to go to 1,000 over the next 5 years and another 85 aircraft operating in Natchez Europe. Of the North American aircraft, roughly 40% are on Avance today and 60% are Classic Gogo ATG product. They are planning upgrades to advance for all their North American aircraft and then future upgrades to either 5 gs and or HDX depending on mission. NetJets Europe flies 70 aircraft that are equipped with Gogo equipment today, largely to provide in flight entertainment, but 40% of those are already on the Avance platform and they plan to upgrade all of those 70 to Avance with HDX Galileo antenna.

Speaker 2

Most importantly, NetJet is the bellwether of the business aviation industry. In order to make sure that they can provide the products and service that NetJets wants to install. And that should create great pull through demand for Gogo. As I mentioned at the outset, 2024 is an exciting year for Gogo as we deliver Gogo 5 gs and Galileo and continue to execute on our strategy. We are more in demand, more innovative and more poised for value creation than ever.

Speaker 2

Now I'll turn it over to Jesse for the numbers.

Speaker 3

Thanks, Oak, and good morning, everyone. Gogo continued to demonstrate strong demand for our products and services in the Q4, setting new records operationally and financially. Despite the unfortunate delays of our 5 gs program we discussed on our Q2 earnings call, the industry headwinds we've endured and the significant strategic investments we've undertaken in Gogo, 5 gs and Galileo, we delivered solid bottom line financial performance and record free cash flow in 2023. Our ability to achieve these results is a testament to the strength of our business model, financial position and investment strategy. And with the bulk of our strategic investments coming to completion at the end of 2024, we expect our free cash flow to accelerate substantially in 2025.

Speaker 3

In my remarks today, I'll start by walking through Gogo's 4th quarter and full year financial performance. Then I will turn to our balance sheet and capital allocation priorities. Next, I will provide an overview of the financial impact of the SEC program. And finally, I will provide additional context on our 2024 financial guidance and the long term targets we announced this morning. For the Q4, Gogo's total revenue was $97,800,000 down 10% year over year and remained relatively flat sequentially.

Speaker 3

Gogo's top line was driven by record service revenue of $80,900,000 up 5% year over year and 2% sequentially. In the Q4, our ATG aircraft online reached 7,205, up 4% year over year and 1% sequentially. Total Avance aircraft online grew to 3,976, an increase of 21% year over year and 5% sequentially, driven by a record number of total activations as Oak described. We expect another strong year of Avance activations in 2024 as we plan to aggressively upgrade our classic Gogo Biz ATG customers as part of the FCC program, while maintaining a reasonably conservative view on improvements in the maintenance cycle times that have slowed installations over the past year. Upgrading our customers to Avance is a critical part of our strategy, as it extends customer lifetimes due to the easy upgrade path to Gogo 5 gs and Galileo.

Speaker 3

However, it will mute the ATG aircraft online growth rate. Total ATG ARPU grew 1% year over year to $3,387 driven by a shift in product mix. The launch of Gogo 5 gs in Galileo will further expand our ARPU growth opportunity over time. Turning now to equipment revenue. Gogo delivered $16,900,000 in equipment revenue in the 4th quarter, a 45% decrease year over year.

Speaker 3

We had a tough comparison to our record prior year quarter, compounded by the parts and labor dynamics and order slowdown in anticipation of our new product launches. Equipment revenue decreased by 8% sequentially as the 5% increase to 202 Advanced units sold in the 4th quarter was offset by a $4,000,000 reserve primarily driven by a specific customer circumstance. Now on to profitability. Gogo delivered service margins of 78% in the 4th quarter, remaining relatively flat compared to the prior year quarter and 1 percentage point higher sequentially. We expect service margins to be in the 75% range this year, with a slight decrease in future years as Google Galileo's concentration of product mix increases over time.

Speaker 3

Service revenue and margin continues to be the primary lever for free cash flow generation and long term value creation. Equipment margins were 9% in the 4th quarter, 23 percentage points lower than the prior period prior year period. The decrease was primarily due to an increase in production cost as a percentage of revenue due to lower equipment revenue in the quarter and also by increased inventory reserves, which negatively impacted equipment margin by 9 points. Equipment margins were 24 percentage points lower sequentially, driven largely by the $2,000,000 accrual taken in the Q3 for the expected FTC reimbursement of costs incurred in prior periods for aircraft replacements, along with the increased inventory reserves I just mentioned. We expect equipment margins in the 20% range in the near term and to decrease slightly in the long term as the mix of lower margin Galileo units sold increases over time.

Speaker 3

Moving on to operating expenses. 4th quarter combined engineering design and development, sales and marketing and general and administrative expenses increased 20% year over year and 19% sequentially to $35,000,000 The increase in the Q4 is primarily due to approximately $3,000,000 in legal expenses related to the SmartSky patent litigation and global sensing efforts to support Galileo. Gogo expects 2024 to be a significant investment year as we continue to invest in our Gogo 5 gs and Galileo program. We expect that these new products will accelerate revenue and free cash flow growth over the long term and are the key foundation for our long term financial targets that I will discuss shortly. In terms of Gogo 5 gs in the 4th quarter, our $2,000,000 of 5 gs spending was comprised of $400,000 in OpEx and $1,600,000 in CapEx.

Speaker 3

The 5 gs delay has pushed approximately $10,000,000 of CapEx and approximately $7,000,000 of OpEx from our original plan in 2023 into this year. The delay also dampens revenue, EBITDA and free cash flow in the coming quarters. We expect 2024 will include approximately $8,000,000 of 5 gs OpEx and approximately $12,000,000 in CapEx. We continue to maintain our estimate of $100,000,000 in total external development and deployment costs for our 5 gs program and anticipate no negative impact on the overall program costs from the delay. All of these impacts are reflected in our 2024 financial guidance.

Speaker 3

Now on to Gogo Galileo initiative. In the Q4, Gogo recorded $2,500,000 in operating expenses related to Galileo. We continue to expect external development costs for both the HDX and FDX solutions to be less than $50,000,000 in total, of which $9,000,000 was incurred in 2023, approximately $25,000,000 is projected in 2024 and the remainder in 2025. We anticipate approximately 90% of Gogo Galileo's external development costs will be an OpEx. Moving on to our bottom line.

Speaker 3

Gogo recorded $35,100,000 in adjusted EBITDA in the 4th quarter, a 24% decrease year over year and 19% decrease sequentially, driven by lower equipment profit and an increase in legal expenses as described. Gogo delivered net income of $14,500,000 in the 4th quarter, down 48% year over year, translating to $0.11 in basic and diluted earnings per share. As a reminder, our financial statements reflect non cash income tax expense as we continue to generate positive pre tax income. Based on our substantial NOL position at the end of 2023, including $446,000,000 in federal net operating losses and $377,000,000 in state net operating losses, this results in a net deferred income tax asset of $217,000,000 We do not expect to pay meaningful cash taxes through our 5 year planning horizon. As a reminder, our shareholder rights plans that were designed to preserve NOLs expired in September 2023.

Speaker 3

Thus, there are no limitations to shareholders buying over 5% of equity. In the Q4, we generated record free cash flow of $28,400,000 an increase from $25,000,000 in the year ago period and $21,000,000 last quarter. The year over year increase was primarily driven by lower CapEx associated with 5 gs and lower net working capital. I will now turn to a discussion on our balance sheet. Gogo ended the quarter with $139,000,000 in cash and short term investments and 606 $900,000 in outstanding principal on our term loan, with our $100,000,000 revolver remaining undrawn.

Speaker 3

Gogo's net leverage remains at 2.9 times in line with our target range of 2.5 times to 3.5 times. As previously mentioned, we have a hedge agreement in place and we currently have 87% of our loan hedged. The next step down in the hedge to $350,000,000 occurs in July 2024 with an increase in strike rate from 0.75 percent to 1.25 percent. Our cash interest paid for 2023 net of hedge cash flow was $41,500,000 which includes approximately $10,000,000 for 2 months of interest expense related to 2022. Assuming no further debt pay down, the cash interest paid for 2024 net of hedge cash flow is expected to be approximately $33,000,000 Now I will provide a recap of our 2023 full year results.

Speaker 3

Gogo generated total revenue of $397,600,000 down 2% from 2022 at the top but at the top end of our guidance range. We delivered record service revenue of $318,000,000 up 7% from 2022, driven by a record number of total Avance activations, including classic to Avance upgrades. Gogo's equipment revenue was 79 point $6,000,000 down 26% from 2022. We reached adjusted EBITDA of $162,100,000 down 7% through 2022, but above our 2023 guidance range despite lower revenue throughout the year. Net income increased 58% year over year to $145,700,000 primarily driven by a $48,100,000 tax benefit due to the partial release of the valuation allowance on our deferred tax assets in the 2nd quarter.

Speaker 3

We delivered a record free cash flow of $82,700,000 up 43% from $57,800,000 in 2022 due to lower CapEx and lower net working capital. While revenue was well below our expectations due to the industry dynamics we have discussed, the 5 gs delay and the resulting wait and see situation, our bottom line and free cash flow were better than expected. The increasing demand from customers for connectivity and Gogo's robust business model is a testament to the strategy we are employing for long term financial growth and success. Now let me turn let me provide a recap of Gogo's capital allocation priorities, which are in service of our current strategic goals. We are focused on 1st, maintaining adequate liquidity 2nd, investing in strategic opportunities to drive competitive positioning and financial value, including Gogo 5 gs and Galileo 3rd, maintaining an appropriate level of leverage for 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.

Speaker 3

As we mentioned last quarter, we were comfortable moving to priority 4 in returning capital to shareholders as our Board of Directors approved a share repurchase program in September with no set expiration date that grants authority to repurchase up to $50,000,000 of shares of common stock. In the Q4, Gogo repurchased approximately 480,000 shares for a total cost of approximately $4,800,000 and an additional 566,000 shares for a total cost of approximately $5,200,000 in January, reflecting our confidence in the long term value of Gogo and in the strength of our balance sheet. Looking ahead, we need to continue to balance the use of cash over the next year across our capital allocation priorities, but believe we are well positioned to execute our investment schedule, continue to evaluate further debt pay downs, especially in consideration of the upcoming hedge step down I previously mentioned, and expect to have more opportunities to return capital to our shareholders in the future. I will now provide an update on the expected financial impact of the FCC reimbursement program. Gogo expects to receive $132,000,000 from the program as it is partially funded.

Speaker 3

However, we are awaiting Congress's decision on full funding, which could substantially increase our reimbursement up to the approved $334,000,000 As a reminder, we submitted our first claim in July 2023, which triggered the start of the 1 year clock to complete the program by July 21, 2024. In our application, we stated that we will need to have multiple extensions to complete the program and are planning to request an extension in the near term. Gogo has incurred and will continue to incur cost of this program in 3 main areas: 1st, network equipment for cell sites and data centers 2nd, airborne equipment for the swaps of LTE air cards to replace EBITDA air cards and partial rebates for customer installation costs to enable existing customer aircraft to communicate to the new network and third, operating expenses. We expect that the spend will be partially offset by the FCC reimbursement. As of December 31, 2023, we recorded an 18.3 dollars 1,000,000 receivable from the SEC, as we spent approximately $20,000,000 of reimbursable expenses and recouped approximately $2,000,000 in cash reimbursement.

Speaker 3

This receivable is included in prepaid expenses and other current assets in our balance sheet with corresponding reductions to property and equipment, inventory and contract assets and with a pickup in the income statement. Since the program is currently partially funded, we have some optionality in what we request reimbursement for, which could impact where grant money received will be recorded between the income statement and balance sheet. As we mentioned last quarter, we are currently seeing reimbursements coming in quicker than expected, potentially changing the swing effect on free cash flow over the years. However, with partial funding, we are forecasting that we will run out of reimbursement funds in late 2025 and will need to continue to spend money in support of the program through 2026, which will negatively impact 2026 free cash flow. Now I'll turn to the guidance and long term targets we announced this morning, starting with some additional color on our 2024 projections.

Speaker 3

Those 2024 projections reflect our anticipated increase in Galileo spend and the impact of the push out of 5 gs spend from 2023. These investments coupled with lower shipments and the aviation industry dynamics challenging aircraft online in 2023 and the delay of Gogo 5 gs will constrain our 2024 performance as we stated previously. Zillow expects 2024 revenue to be in the range of $410,000,000 to $425,000,000 This implies 5% overall growth with equipment revenue expected to grow faster than service Service revenue growth will be slower than the growth rate in 2023 as we project a significant number of upgrades from classic to advance driven by the FCC program and while strategically important will dampen aircraft online growth. We anticipate 2024 adjusted EBITDA in the range of $110,000,000 to $125,000,000 This guidance reflects operating expenses of approximately $40,000,000 strategic and operational initiatives, including approximately $8,000,000 in expected Gogo 5 gs spend, approximately $20,000,000 of Gogo Galileo development spend, approximately $9,000,000 in LTE spend that is not reimbursable by the FCC, and approximately $3,000,000 in additional operational initiatives. Our adjusted EBITDA guidance also includes approximately $4,000,000 related to legal expenses tied to the SmartSky patent litigation.

Speaker 3

We expect 2024 CapEx to be approximately $45,000,000 which includes approximately $25,000,000 for the following strategic initiatives: approximately $12,000,000 for Gogo 5 gs $5,000,000 for Galileo and approximately $8,000,000 for the LTE network build out related to the SEC's reimbursement program. We also expect free cash flow of $20,000,000 to $40,000,000 which includes approximately 50 $6,000,000 of expected FCC spend, including non reimbursable development spend and approximately $45,000,000 in FCC reimbursement. Now turning to our long term targets. We recently updated our long term model, which reflects the launch of Gogo 5 gs and Galileo in the Q4 of 2024 and the build out of the LTE network and associated customer conversion related to the FCC reimbursement program by 2026. Our long term targets are as follows.

Speaker 3

We expect revenue growth at a compound annual growth rate of approximately 15% to 17% from 2023 through 2028, with Galileo contributing to revenue beginning in 2025. We expect we continue to expect free cash flow in the range of $150,000,000 to $200,000,000 in 2025. This does not take into account the effect of the FCC program. The projected significant increase of free cash flow in 2025 is due to increased EBITDA driven by revenue growth, the launch of Gogo 5 gs and Galileo, reduced engineering design and development OpEx and lower CapEx as investment in these strategic programs are completed, and positive net working capital driven by inventory purchases and prepayments planned in 2024 or 2025 equipment shipments. We expect annual adjusted EBITDA margin to be reaching 40% by 2028.

Speaker 3

While still projecting healthy margin, it is lower than our prior expectations of mid-forty percent driven by the delay in 5 gs launch and increased share of Galileo revenue with lower incremental margins compared to ATG. These updates reflect our expectations to perform strongly and drive further value creation for our customers and shareholders as we execute our strategy. Sogo's business continues to perform well, our outlook underscores the 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 are anticipated to extend and enhance our long term growth. Before we open the call up for questions, I would like to join Oak in thanking the entire Gogo team for their hard work and dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks.

Speaker 3

We're now ready for our first question.

Operator

Thank you. And our first question coming from the line of Simon Flannery from Morgan Stanley. Your line is open.

Speaker 4

Great. Thank you very much. Good morning. Thanks for all the detail. If I could turn to Galileo, there's been concern about some delays on the OneWeb constellation, particularly around ground stations.

Speaker 4

You didn't really reference any delay concerns around that. I wonder if you could just help us understand what's the status of your understanding with OneWeb and then any risk of some further delays because they could continue to delay commercial launch? And then on StarLink, you talked about small antennas. Can you just help us understand what you're assuming in terms of StarLink's ability to address your existing fleet? Is that small antenna going to be competitive with the HDX antenna?

Speaker 4

And just on the kind of cost both of install and of service that you're seeing from these satellite services versus your existing ATG? Thank you.

Speaker 2

Sure. So we believe StarLink I mean, I'm sorry, OneWeb will have the ground network complete to our satisfaction by the time we launch. We don't anticipate operating in Soviet Union or China or North Korea, places like that. So people always need to be cut off, is it totally global? Well, no, not really.

Speaker 2

You're not going to be able to fly over places you might get shot down. But generally, we think that they will be they'll be done in time for us. So we're pleased about that. Your second question was about, I believe, the STARLINK small antenna.

Speaker 4

Yes, exactly. And the pricing around StarLink versus your AirTag brand?

Speaker 2

Yes. So, well, we don't they haven't announced a small antenna. So just for planning purposes, we've assumed that they will. We don't know that they will. That's their decision, not ours.

Speaker 2

So we don't know what it is. They've got various applications at the FCC for a wide variety of antennas of various different sizes, mostly for consumer market. But then they could repackage one of the smaller versions of those for aviation. It's difficult to do. We're not sure that those really are going to be aviation grade in the long run and have the reliability and durability of our equipment, which is designed from the ground up for aviation.

Speaker 2

But so you have to ask StarLink that question about what they might launch in terms of the SponTetta. For us, it was just a planning assumption, okay? Understood. And then I think your last question was about install costs all in.

Speaker 4

Yes. Just when you're thinking about people looking at geo versus lee, are you going to have a dual system where people use Galileo over water and use LTG domestically? And how do those are you dramatically cheaper than a satellite solution?

Speaker 2

Yes. I mean today it costs about $700,000 to install a GEO satellite solution. We're much cheaper today than that. I think we will be less than half that cost in terms of equipment sale plus installation. And that's for a new installation.

Speaker 2

Of course, if you have Avance, that will be a lot cheaper because you won't have to do anything really inside the aircraft. You just have to add the antenna and the 2 cables power in and power out and the data in. So we're considerably cheaper. We'll be considerably cheaper on service as well, as well STARLINK. And we just use their recently announced $10,000 a month unlimited plan.

Speaker 2

Today you pay $30,000 $40,000 a month to geostationary satellite provider for an unlimited global plan. So they're either going to have to cut their pricing a lot to compete or which will be a big hit to them in terms of their cash flow or lose business. That's a pretty tough choice. I think that the superiority of LEO over GEO is substantial having used both. I mean, it's just an order of magnitude improvement when you go to LEO.

Speaker 2

The latency is obviously much faster and then the capacity is also greater. So So it's a much better experience. So when you combine the fact that it's going to be much cheaper to install, it's going to be much cheaper to operate and the performance is much better, We think that if StarLink keeps coming into the market that they will impact have a big impact on the GEO players and our Galileo product will do the same. And we think we have a few advantages or getting in some parts of that heavy jet market, which are that we do have 1300 jets on advance already. For them, it's a very easy upgrade to add our product.

Speaker 2

So as I said in my script, I think we see StarLink if they enter and us both having a pretty significant impact on the geosatellite players.

Speaker 4

Great. And just one last one on SmartSky, you referenced some of the litigation expense. Any updates there on their kind of presence in the marketplace?

Speaker 2

No, not really. We don't see any progress by them in terms of installing aircraft.

Speaker 4

Great. Thanks a lot.

Speaker 5

Thanks, Sam.

Operator

Thank you. And our next question coming from the line of Ric Prentiss with Raymond James. Your line is open.

Speaker 5

Thanks. Good morning, everybody.

Speaker 2

Good morning, Rick.

Speaker 5

Hey. Couple of questions, follow on Simon's questions there too. So as you think about the addressable market, how are you taking a shot at what you think your market share will be as we look over say the next decade? And then who do you share that market with? Is it SpaceX StarLink?

Speaker 5

Is it other LEO operators that you're starting to keep an eye on as well? But just help us understand kind of your base assumption to hit those free cash flow targets and the revenue CAGR targets about what the addressable market split up share might be?

Speaker 2

Yes. So I can't give you 10 year because we didn't do that. We just did 5.

Speaker 4

Hope that

Speaker 2

will do. Okay. So, yes, this is all part of our annual long term model update that creates the guidance and everything else. So, yes, we build it from the bottom up. We go both North America, we buy the world in North America and rest of world.

Speaker 2

We divide it into different segments of jets and then we look at everybody's value proposition and where we think they're going to be going in terms of pricing, product, etcetera, and then build the numbers up from there. So obviously, we've got a big head start over everybody in the small and midsized jet market. We actually have the largest share of the heavy jet market today. A lot of people don't realize we've got 2,200 heavies. I think the next biggest player has about 1800.

Speaker 2

So we have our we add our project rollout plans to that in terms of what we think we're going to be getting in terms of upgrades, new wins, etcetera. We look at our OEM positions and what the OEMs are going to be producing and what our attachment rate is at those OEMs. We go through the dealer channel and we look at everything that's being sold there and estimate what our share is going to be. So we build it really, it's very granular and bottom up approach. I think I shared the numbers in my script.

Speaker 2

Today, if you look at the global market and we include turboprops in our market, okay? We have of the installed planes, we're in the low 70% of the global market. We're in the sort of low 80s in the U. S. Market, which is by far the largest market.

Speaker 2

And even though there's going to be a shift over the next 5 years, we kind of just maintain those market share levels. The overall market penetration globally today only about 24% I think of aircraft business aircraft have in flight connectivity installed. And I think we see that going up almost to 50%, 60% over the next 5 years to the mid-30s. So the reason we can kind of maintain share while others are also winning planes is that of course that the overall market is growing quite a bit in terms of installed aircraft. We StarLink in our for planning purposes and we don't know what StarLink is going to do or if they're going to succeed, but we take sort of a worst case view of the world.

Speaker 2

And so we plan on their succeeding on their FTC schedule as they've published it. And then we make this bold assumption that they probably want to add a second antenna at some point. And so based on that, they and we have about an equal penetration of the heavy jets outside the U. S. And I think we get to 20 percent of that market.

Speaker 2

So I think they would get to something similar in our projections. And we think that given those assumptions, they have a relatively strong start. I'm not going to give out the exact numbers where we think they are in 5 years, but it would be a very successful program compared to the launch of Geosatellite products, for instance, in the mid around 2025, 2015, 2016. They got up to 1500 something like that jets in about 5 or 6 years. And I think you'd see something similar for StarLe.

Speaker 5

Okay. That's very helpful. Very granular like you said. Thank you. I want to come back to the 24 free cash flow guidance.

Speaker 5

Can you walk us through how can we get from EBITDA taking into account no cash taxes, you talked about cash interest. Help us walk through the start of the EBITDA of about $110,000,000 to 125,000,000 dollars How do we end up at $20,000,000 to $40,000,000 on free cash flow? Obviously, there's a lot of FCC stuff going on there. There's working capital. Just kind of help us bridge that EBITDA all the way down to free cash flow in 2024?

Speaker 3

Yes. So exactly our adjusted EBITDA range is the $110,000,000 to $125,000,000 Our CapEx is projected to be at $45,000,000 And then we do have negative net working capital. So, just kind of the main part of the difference and there is a lot of buildup of inventory that we're doing in 2024 in anticipation of 2024 and 2025 shipments. And then of course, we also have the net interest that we have as well included in there too.

Speaker 5

Okay. So it really is the working capital and the inventory build out that probably is the bigger swings there and the upstream?

Speaker 3

Yes, the net working capital and interest.

Speaker 5

Yes, yes. Okay. And then, Jesse, I think you mentioned that under the current funding for as we call it rip and replace, their spending will continue, but reimbursement would be played out unless they increase it. You mentioned that there could be a 26 free cash flow hit. Can you put a kind of a fence post around that and let us know kind of what the current program funding and your current thoughts would be as far as the hit in 26 free cash flow from the program?

Speaker 3

So as Oak mentioned, we don't anticipate needing the entire 334,000,000 dollars And our the reimbursements will end around towards late 2025. So there'll be some impact in 2025, but a greater impact in 2026. It's probably going to be somewhere in the range of $30,000,000 to $40,000,000 in 2026.

Speaker 5

Okay. And the $25,000,000 long term guidance of $150,000,000 to $200,000,000 excludes any effect from FCC. Would that be a negative effect in 25 number as well from the FCC program? I know it's pretty complicated and a lot of moving pieces in DC, but just wondering is that a negative hit that would hit 25 from that versus that 150 to 200?

Speaker 3

So we I mean, the reason why we've been saying it excludes our guidance excludes that just to be able to do the comparison to when we originally provided the targets. So that's why we want to yield an apples to apples comparison. There is going to be a small impact in 2025. It's not as big as 2026. But

Speaker 2

yes. Okay. So we believe we still end up in The range even with the FCC in 2025.

Speaker 3

Right. Obviously, depending upon timing, but as of what we're seeing now and the timing of the reimbursements, we expect that we will be in the range both with and without FCD.

Speaker 5

Okay. That's helpful. And then last one for me. I think you mentioned you're getting your first fuse antenna coming and start trying in the summer. What's the first, did I hear that correctly?

Speaker 5

And second, what is kind of the thoughts then of being able to ramp that up falling behind Simon's question about waiting for OneWeb, obviously, to get the ground all the way there before launch. But where are you at on Hughes and what's the kind of the ramp as far as getting antennas from Hughes?

Speaker 2

No, we're right on schedule to launch this product in mid Q4. So that's the update. And this Hughes has performed exceptionally well so far and this antenna arrives right on time as called for in the project plan and is testing well. So we're very pleased with the progress there and remain on track.

Speaker 5

Okay. Thanks, everyone.

Speaker 4

Thanks, Rick.

Operator

Thank you. And our next question coming from the line of Louie DiPalma with William Blair. Your line is open.

Speaker 2

Hey, Louie.

Speaker 6

Good morning, Oak, Jesse and Will. I have a general question on hardware equipment costs. One of the main value propositions of AVANCE is the inexpensive and easier upgrade to 5 gs and the Galileo networks. And I was wondering, in general, what would you estimate is the difference in equipment cost for a customer to upgrade to hypothetically 5 gs versus if they order rip and replace and try to go to a competitor's like LEO satellite solution?

Speaker 2

It all depends where you start, right? So if you've got L5 installed on the DDA antennas, it's going to be yes, it's going to probably be that's going to be probably 2 thirds the cost for equipment and installation that going to a competitor satellite product would be.

Speaker 6

Okay. That makes sense. Thanks for that. And secondly, Oak, you referenced the FPGA 5 gs testing. When should we know if and when the new 5 gs chip is ready for production?

Speaker 2

Well, right now, it's actually these are very technical terms. So production in chip world means you're in mass production and they're not there yet, obviously, but they are in production in our sense. They're in the pattern of mass generation phase right now and that's what happens right before you start fabrication of the chip silicon layer by layer. So that's where we are.

Speaker 6

Okay. When should we know if the new chip works in terms of like the 5 gs components and the non 5 gs component in order to clear the hurdles that weren't cleared on last year?

Speaker 2

Yes. Well, so the FPGA will let us test whether the software side of the chip works because that's what it is. It's sort of a big it's a very big box. I would spend some time with it yesterday. But it emulates the physical structure of the FPGA and you can run the I mean of the 5 gs chip and you can run the actual 5 gs chip software on it.

Speaker 2

So you get all the software testing out of the way in the FPGA stage, which is sort of novel and is giving us the ability to really accelerate the program. So I would say we'll know whether that is all going well in April, May timeframe. There's a lot of tests. It's very complicated. We've got 14 layers of the chip that have our that are unique to us and run our software.

Speaker 2

And it's all about accommodating things like how fast radio waves move at the speed of light, the Doppler effect and signal strength and it's massively complicated. But we got a lab here in Chicago that emulates all that and that's what we're doing now and doing that testing. So you'll know, we think April, May if that software is all doing well. And then it will probably we don't have the fabrication masking just started and probably be several weeks before we understand exactly how long it will take to lay each layer of silicon. And then once we know that pace, we'll know when the chip will come out of the fab.

Speaker 2

And then you have to go through bring up to actually test it to make sure it's all working. So we'll probably update people on that on the 2nd quarter call or if we have any milestones between now and then that we can announce publicly.

Speaker 6

Great. Thanks. And for Jesse, as it relates to the 2025 free cash flow guidance, you mentioned how it does not include the FCC reimbursement program and you also discussed I think how for this year you have an 18 $1,000,000 receivable such that like the cash inflows seem to lag your cash outflows. And so is the SEC program expected to be negative for free cash flow in 2025? And is there any way to frame that?

Speaker 3

Yes. I was answering Rick before that we there is going to be a small negative impact in 2025 for two reasons. One is we continue to get a little bit of that lag, but then the funds do run out in late 2025. But as mentioned in terms of the guidance we provided, we feel that even with that, of course, if the timing of things change with the SEC reimbursement cycle, then that potentially can change things. But regardless, we do feel that we will still be within that range with FCC.

Speaker 3

But it is slightly negative in 2025.

Speaker 6

Great. And my final one, you referenced the potential for debt pay down. Is there any framing in terms of how much like debt pay down would you be looking for like potentially to keep like the cash interest expense at that same like $33,000,000 like annual run rate? And is that what you're looking to do?

Speaker 3

No. I mean, I think that when we look at this, we want to make sure that we kind of balance the use of our cash between debt pay down and potential additional returning of capital to shareholders. So we'll look at both and kind of assess. We also need to see where our interest rate is going to be going. But with all of this, we do need to consider the hedge stepping down.

Speaker 3

So we haven't necessarily identified an exact target yet that we're building a share, but we'll keep all these different factors in mind. Well,

Speaker 2

the other major factor is share price. And with the share price down where it is, returning capital to shareholders becomes more attractive relative to paying down debt than if the share price were higher. So the Board of we're going to have active conversations with our Board on our plan. And as you know, we spent $10,000,000 on share buybacks in Q4 and Q1 so far. And we can't trade today.

Speaker 2

So we'll be in conversation with the Board tonight about what we're going to do.

Speaker 6

Excellent. I think you're implying something, Oak. Thanks. Thanks a lot, everyone.

Speaker 2

Thanks, Louie.

Operator

Thank you. And our last question coming from the line of Sergey Topescu with Camco Investors Inc. Your line is open.

Speaker 7

Good morning. Thank you for taking the questions. My first question is on Galileo. As you launch that product, what markets or market segments would you prioritize in your push to sell global broadband over the next 2 or 3 years?

Speaker 2

I think you're asking what markets we would prioritize? Geography. Geography. Oh, geography, yes. Well, look, I guess, I always start with the most attractive market.

Speaker 2

So to that, those are probably Europe, Middle East, India, will be early on the list. But South America is very attractive markets as well, so we will be paying attention down there. And then probably Asia after that. That's rough order of events.

Speaker 7

Got it. And my second question, given where the company is today and significant organic growth opportunity, how do you guys think about M and A? Maybe if you could remind us your M and A philosophy and what makes sense for Gogo over medium terms that could accelerate utilization of your current strategy or just enhance overall shareholder value in general?

Speaker 2

Yes. I think our view is that our organic growth is the right place for us to invest capital to grow the company. And we see really nice returns on that. And we also feel that that is less risky than M and A. So we don't have an active M and A program right now just based on that.

Speaker 7

Got it. Thank you.

Speaker 2

Thank you.

Speaker 1

Thanks, Roger.

Operator

Thank you. And I will now turn the call back over to Will.

Speaker 1

Hello. This concludes our Q4 earnings call. Thank you for your participation. You may now disconnect.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Gogo Q4 2023
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