Gogo Inc.

Good morning, ladies and gentlemen, and welcome to the Q4 2020 GoGo, Inc. Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, you can press star then zero, and an operator will be online to assist you. I would now like to turn the conference over to your speaker today, Mr. William Davis, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Deb, and good morning, everyone. Welcome to GOGO's fourth quarter 2020 and full year 2020 earnings conference call. Joining me today to talk about our results are Oakley Thorne, President and CEO, Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on the conference call. These risk factors are described in our earnings press release filed this morning. and are more fully detailed under the risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is March 11, 2021. 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'll 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 fourth quarter earnings press release. This call is being broadcast on the Internet and available on the investor relations section of the GoGo website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.

Thanks, Will, and good morning, everyone. and welcome to our first quarterly earnings call as the new go-go. Obviously, the highlight of the fourth quarter was clearly our completion of the sale of our CA business to Intelsat for $400 million. And today, we're a more focused company with an industry-leading technology, a strong market position, a dependable recurring revenue model and a stronger balance sheet, all positioning us well for long-term growth. This morning, I'll walk through the highlights of our financial results of continuing operations for the fourth quarter and full year 2020, give some color on the market trends and competitive advantages that we believe will drive the new Go-Go's long-term performance, and describe how those factors contribute to our outlook for fiscal 2021 and beyond. And I stress beyond because 2021 will still be impacted by COVID. and will still bear transition costs as we migrate from being a bigger unprofitable company to being a smaller profitable company. Let me start with the fourth quarter results. The impact of COVID-19 on our 2020 results can't be overstated. However, I think our team managed extremely well in an extremely challenging environment and I want to give kudos and thanks to them. We executed a comprehensive 16-lever cost reduction strategy that enabled us to preserve cash and run a leaner, more efficient operation. We completed the sale of the CA business, showing up the balance sheet and focusing our resources on an attractive, resilient market where we have deep competitive moats. And we actually expanded our installed base, growing our ATG aircraft online, or AOL, by 2% year over year. Gogo delivered Q4 2020 total revenue from continuing operations of $77.6 million, down only 10% year-over-year. Not bad when you consider that most business travel was still at a standstill in the quarter. On a quarter-over-quarter basis, we obviously did much better as we were still coming back from the COVID low point that occurred in Q2. with total revenue growing nearly 17% from Q3, driven by a 7% increase in service revenue and a 57% increase in equipment revenue. Sequential service revenue was driven by a 4% increase in AOL and a 2% increase in average monthly connectivity revenue per ATG aircraft, or ARPU. Importantly, GOGO entered 2020 with 5,669 ATG subscribers online and ended 2020 with 5,778 subscribers online, topping our pre-COVID quarterly peak. On the equipment side, Q4 was by far our highest quarter of the year at 21 million, up from $13 million in Q3 and equal to our quarterly average for 2019. Total ATG units online set a quarterly record at 5,778 versus 5,669 at year end 2019. Total advanced units online reached 1,719 at year end, up 532 or 45% from year end 2019, and now account for 30% of the ATG broadband install base. I'll touch on why expanding the proportion of advanced platform users in our subscriber base is such a positive impact on GoGo over the long term. In the fourth quarter, the business aviation industry generally proved its resiliency. We look at business aviation flight activity as a proxy for demand for our products. And in Q4, we saw a strong rebound in flights as more passengers shifted from commercial to business aviation travel. and those passengers demanded quality in-flight connectivity. Our customers flew 83% of the number of flights in Q4 2020 as they flew in Q4 2019. Up from 81% in Q3 2020 versus Q3 2019 and up from 47% in Q2 2020 versus Q2 2019. In December, that number actually rose to 85% of 2019 flight counts and actually hit 100% for the last two weeks of December. And we continue to see improvement this year as flight counts rose to 86% of the 2020 count for January and 88% of the 2020 flight count in February. We see the strongest performance recovery among our charter and fractional customers. which in February flew 108% and 103% respectively of their February 2020 flight counts. Meanwhile, our corporate flight department customers have cut travel considerably and in February only flew 75% of their February 2020 flight counts. We think this bodes well for future business demand because we expect corporate flying to come back as vaccines are rolled out. and though leisure demand may wane a bit, we expect the aggregate demand for flights to be positive. And as demand recovers, we expect more aircraft to be pulled into service and more GOGO systems to be activated. Usage is another important measure for us because it reflects the utility of our products to passengers and their demand to have connectivity on their aircraft. Overall, average data consumption per flight through the end of February 2021 was 20% above average consumption for the same period in 2020. And on major charter and fractional fleets, consumption per flight was 30% over pre-COVID rates, further demonstrating that reliable in-flight connectivity is more of a must-have than ever. The impact on us of these trends has been positive. We had 567 gross ATG activations in the quarter, of which 349 or 62% were new accounts, and 218 of those were upgrades, mostly from our classic product line. We've also seen account suspensions, which spiked in the March-May 2020 timeframe, settle back down to pre-COVID levels. On an even more positive note, of the more than 1,100 account suspensions we suffered in the first three months of COVID, about 80% have come back was 93% of those choosing the same or a higher price plan. And of the 928 planned downgrades we suffered in that period, 87% have restored their old plans or bought upgraded plans. In general, we had a very strong quarter. However, our profitability was negatively impacted by a $10 million accrual for the full year 2020 bonus payout. Normally, that expense would be accrued over the course of the year, and wouldn't hit quarterly numbers with such magnitude. This occurred because as part of our COVID-16 lever cash management program, our compensation committee decided early last year that we would pay out 2020 bonuses in stock, which was recorded as stock-based compensation and excluded from adjusted EBITDA. However, once we completed the Indosat transaction and had adequate cash on our balance sheet, The committee decided we would pay the bonus in cash, which led us to accounting for the full year bonus in one quarter. Now let me turn to the new go-go. We enter 2021 as an agile, niche-focused company, and we're looking forward to more comprehensively introducing the new go-go more thoroughly to the market in the second quarter of this year. But today, I want to touch on the opportunities we see in front of us, and how we plan to take advantage of our core strengths to capitalize on those opportunities. Let me start with the market opportunity. First off, though the business aviation market is relatively small compared to other mobility verticals, it holds a lot of opportunity for a niche-focused company like GOGO. Sixty-six percent of the world's business aircraft are registered in North America. and more than 70% of those, roughly 18,000 aircraft, do not yet have broadband in-flight connectivity. For the last five years, GOGO has added an average net of 400 aircraft online per year, and we feel we can sustain that pace or a little better over our five-year planning horizon. We think a number of trends support that level of growth, including The growing demand for connectivity as COVID has led all of us to spend more time online than ever before. The uberfication of business aviation as more connected passengers turn to charter or timeshare models to access travel. The trend of commercial airlines cutting service to secondary markets. The desire of corporations to protect executives from health risks. and the fact that inventory of second-hand aircraft for sale has hit all-time lows, which should lead to more new jet orders and aircraft online for GOGO. Now let me turn from the market opportunity to some of our core strengths, starting with our ATG network. Our ATG network and proprietary FCC license spectrum give us a unique advantage in serving the U.S. market over our traditional satellite competitors. providing positive vertically integrated owner economics. Our equipment is small and light compared to satellite equipment and fits on midsize light jet and turboprop aircraft that cannot support the size and weight of satellite equipment. Even in the large jet market, we have more jets activated in the U.S. than all of our traditional satellite competitors combined because our equipment and service is lower cost and our service is of equivalent or better quality given its low latency. I should note this quality aspect has improved considerably over the past five years as our former commercial aviation division has offloaded most of its mainline aircraft from ATG to satellite connectivity. We anticipate that with advances in technology, namely electronically steerable array antennas, satellite antennas will get smaller over time. but as we invest in improving our ATG network, we expect ATG to remain competitive, especially amid the smaller aircraft that fly US-based missions. Speaking of investments in new ATG technology, let me touch on GoGo 5G. Our current GoGo 5G network upgrade will allow us to take advantage of the advanced platform's bearer aggregation capability to combine our four megahertz of license spectrum and many more. I should note that our portfolio of 349 patents includes patents related to this aggregation technology. We're extremely pleased with the progress our team and our partners, Cisco, Airspan, and FirstRF have made on this project. However, as is true of many projects in the telecom and satellite space, our schedule has slipped, primarily because of a supply chain delay for one particular microchip, and we now expect to deploy the network in 2022, instead of 2021. Now let me turn to the hidden gem at GoGo, our advanced platform. We've mentioned advanced to the street in the past, but I don't think we've done justice to how advanced is truly a software-centric platform as opposed to just a product. It gives us unique competitive advantage over our competitors who merely have products. So what do we mean by software-centric? We mean that like Apple, where iOS is the operating system for all of their devices, Advanced is our operating system. And all of our devices, whether L3 or L5 on the plane, or our applications in the ground on the ground, in the cloud on the ground, they all run on the same software. Advanced software has many platform advantages. It can support multiple bearers or networks, including satellite networks. In fact, As I mentioned, with 5G, it can aggregate multiple barriers or multiple networks into one channel, or SFID, if one wants to expand capacity for certain users on the airplane. It's engineered to be extensible, easily supporting the addition of new products and features, which soon we'll be able to load over the air. For instance, today, our GoGoVision IFE product is embedded in Advanced. and can be turned on or upgraded remotely by simply turning a software key. This year, we'll enable on-air software updates, thereby saving customers time and money when installing new releases. This is especially important for fleet operators where installing upgrades manually with USB sticks can take months for every release. Now, Vance runs self-diagnostics and it reports them remotely, allowing us to often fix issues before the customer even notices an issue has occurred. and it does much, much more and we'll talk about more in the future. But the main point here is that we can do with minimal hardware upgrades, I'm sorry, we can do all this with minimal hardware upgrades because like Tesla, we do with software upgrades but competitors do with hardware upgrades, saving customers hundreds of thousands of dollars on equipment and weeks of downtime. To prove that point, When we upgrade advanced L5 customers to 5G, most of the upgrade will be software. The only hardware needed will be one small box in the plane and two new antennas that fit exactly where the old antennas fit. The advanced platform also standardized componentry across all advanced devices, which drives down per unit cost and improves quality because our supply chain consists of a higher quantities of a less diverse component base. Needless to say, we're very bullish on advance and believe it gives us the flexibility to adopt and integrate new technologies as they evolve to both defend and grow our current market position and also attack new market segments in the future. The last core strength I'd like to describe today is the deep relationships we have with our customers and distribution partners. We've been building and delivering product for our partners and customers for more than 20 years. and in the case of our distribution partners, we've been making them money for more than 20 years. We have dedicated sales forces focused on the OEM and dealer markets. Our line fit at all nine of the major business aviation original equipment manufacturers and we have a network of 120 dealers worldwide that includes all the major MROs. It's significant to note that dealers invest in developing STCs for GOGO equipment because they're confident that they will sell enough installs to earn a return on that investment. And that's why today, 36 different dealers have 93 different supplemental type certificates for GOGO equipment, covering more than 200 makes and models of aircraft. Likewise, OEMs invest in type certificates. and today Gogo equipment is an option or standard on 45 different makes of aircraft. We also have dedicated sales teams focused on end customers and on strategic accounts to make sure that the ultimate user understands the benefits of our platform and pulls demand through the channel. These deep relationships and the teams we have working with customers enable us to drive product penetration very quickly once a product is released We've sold more than 1,700 advanced units since we launched the product in 2017. And we believe that's more broadband IFC units than all of our competitors combined have ever sold into the BA market. Now let me summarize our strategy as we go forward. First, we'll continue to enhance our ATG network to protect our core markets and drive penetration of the advanced platform. And second, As technology evolves, we'll layer new products and services on top of the advanced platform in order to drive improved product performance, thereby widening our competitive moats and driving customer loyalty. Finally, I'd like to touch briefly on our financial strategy and trajectory and then turn it over to Barry to do the numbers. The last step in our transition to becoming a new go-go is the refinancing of our current $975 million of first lien notes and settling our $238 million of convertible notes. As of last night, we had cash on the balance sheet of $465 million, and as Barry will discuss, we're in the midst of a refinancing aimed at lowering our leverage ratio and lowering our interest expense. Strategically, we'd like to strengthen our balance sheet for three reasons. First, the more free cash flow we generate, the more we can take advantage of future investment opportunities should we see them. Two, the stronger our balance sheet, the more resilient we can be against competition should it arise. And three, the more free cash flow we generate, the more quickly we can further delever and enhance shareholder returns. Towards these ends, our approach to settling the converts will now be aimed at producing a stronger balance sheet. and we expect to settle them in shares for the amount then outstanding. In terms of our financial trajectory, our new five-year plan projects 10% plus revenue growth over the planning period. Steady 35 to 40% adjusted EBITDA margin throughout the five years and significant free cash flow growth beginning in 2023 after the 5G network deployment is behind us. Underpinning that thesis, is our ability to more fully capitalize on the competitive advantages of our industry-leading advanced technology platform, the deployment of the GoGo 5G network in 2022, and significantly reducing our debt service obligations. In the coming months, we look forward to sharing more about our long-term strategic plan and the outlook for the new GoGo. In the meantime, I'll turn it over to Barry to do the numbers.