Gogo Inc.

Good day and thank you for standing by. Welcome to the GoGo First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Mr. William Davis, Vice President of Investor Relations. Please go ahead.

Thank you, RJ, and good morning, everyone. Welcome to GOGO's first quarter 2021 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 May 6, 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 first 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.gogair.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 thank you all for joining us this morning and for your interest in GoGo. The first quarter results we announced today and the completion of our refinancing last week reflect GOGO's strong momentum as we execute on our pure play business aviation connectivity strategy. Today, my remarks will focus on highlights of our first quarter results, business aviation's strong recovery from the depths of COVID, our progress against the strategic initiatives I discussed on our last call, and the impact of the refinancing on our business on a go-forward basis. So let me start with results. GOGO delivered a really strong first quarter, driven by the ongoing recovery of the business aviation market and the strength of our Vox platform. We generated total Q1 revenue of $73.9 million, up 4% compared to Q1 2020, driven by a 3% increase in service revenue and a 10% increase in equipment revenue. The service revenue growth is primarily attributable to a 3% increase in ATG aircraft online, hitting a new record high of 5,892 aircraft. Our ability to rebound from the depths of the pandemic to record aircraft online in just 12 months speaks to the resilience of our team, the strength of our technology, and the mission critical nature of our service to our customers. On the equipment side, GOGO grew first quarter revenue 10% year-over-year, driven primarily by advanced L5 sales and supported by some lifetime buys of Iridium equipment. We also marked an important milestone. 100% of GOGO's ATG equipment shipments in the first quarter were advanced. And as we wind down new sales of our classic ATG product line and customers gravitate to our next generation advanced platform. Despite the strong year-over-year growth, equipment revenue was down 30% sequentially from an extremely strong Q4 of 2020. However, Q4 tends to be our strongest equipment sales quarter, and given our current strong backlog and pipeline, we predict equipment sales overall this year will significantly surpass equipment sales for 2020 by 20%. These strong equipment sales should drive growth in our high-margin recurring service revenue down the road, many of the units we've shipped have yet to come online. Our five-year plan targets the addition of 400 ATG aircraft online per year, and we expect to greatly exceed that number for 2021. On another positive note, we had very low equipment churn in the quarter, hitting an annualized 98.2% equipment retention rate, which equates to more than a 17-year revenue-producing equipment life on an aircraft. This is a significant recovery from our low point of 92.5% in Q2 of 2020. We also achieved strong adjusted EBITDA and free cash flow performance for the quarter, driven by robust equipment revenue, disciplined cost controls, and some delayed spending that will hit later in the year. I'm very proud of the GOGO team and what we accomplished in the first quarter. I think it's a harbinger of good things to come and the culmination of a lot of hard work and strong execution over the past two years. Now let me turn to conditions in the business aviation market. Clearly, the pandemic has driven supportive trends in business aviation, pushing more flyers who can afford to fly private out of health concerns and accelerating the uberfication of air travel as more connected passengers turn to charter or timeshare models to access private aviation. We view BA flight activity as a proxy for demand, as growth in flight activity ultimately drives demand for aircraft, and that will drive demand for connectivity. This is especially true in the corporate and fleet segments, where passengers are insisting on quality connectivity when making their purchase decisions. In order to accurately assess growth in the industry today from pre-COVID times, we will compare 2021 flight activity to 2019 activity. For Q1 2021, average daily go-go flight activity ran at 97% of average daily flight activity for Q1 2019. However, that modest decline was really anchored by corporate flight departments who were still well behind 2019 flight counts early in the year. That all changed in March and April. Corporate flight counts grew from around 70% of 2019 counts in February to 100% of 2019 counts in March and 102% in April. Charter flights grew to 130% of 2019 counts in March and 128% in April. And fractional flights grew to 130% of 2019 in March and 136% in April. This dramatic growth in demand has driven a surge in secondhand aircraft purchases, leaving inventory of for-sale pre-owned aircraft at an all-time low. It's caused fleet operators to delay aircraft retirements, and it's led very reputable Wall Street analysts to raise their projections for OEM deliveries by 6% for this year and another 6% for next year. GOGO is uniquely positioned to take advantage of this opportunity. We're line fit at all nine of the major business aviation OEMs. We have a strong aftermarket network of 120 dealers that sell and install our systems. And there are 93 STCs that cover installing GOGO equipment on more than 200 makes and models of aircraft, far more than any other broadband ISV supplier to the BA market. The other big change in the BA market is the change in passenger behavior. The COVID new normal has driven our end users to live and work online, and they now require streaming and video conference capabilities in flight as part of the work-from-anywhere culture. This demand manifested itself in Q1 data consumption on GOGO-equipped aircraft growing 44% from Q1 2019, which translates into a 32% increase on a per-aircraft basis, and which in turn should manifest itself in purchase of higher data and service plans in the future. GoGo is well positioned to meet this increased data demand with Advanced L5, which delivers faster speeds and enhanced network capacity in our 4G ATG network. L5 enables live streaming of video and audio, video conferencing, and other must-have applications like VPN. To make that demand more affordable, we just announced a new unlimited streaming and data plan, GoGo Biz 4G Limitless, available to our Advanced L5 customers which allows customers to enjoy the benefits of streaming without the unpredictability of high overages. And GoGo 5G will advance our product offering even further by supporting multi-device video streaming, truly extending every capability of the remote office into the sky. Based on the strength of our first quarter performance and the industry tailwind shaping the recovery of the business aviation market, GOGO is raising our 2021 revenue in adjusted EBITDA outlook, and we are going to achieve positive free cash flow for the first time. Barry will provide more details on that in a moment. Now let's talk about our progress on the strategic initiatives I discussed in our last call. As background, let's remember that business aviation is a relatively small market, but it is a highly unpenetrated market. that represents a big opportunity for a small company like GOGO. Of the 24,000 business aircraft in North America, only 28% have broadband Wi-Fi today, and of the 14,000 business aircraft in the rest of the world, less than 1,000 have broadband today. Our strategy is to leverage our three unique competitive advantages, namely our proprietary ATG network, our advanced platform, and our strong distribution channels, to strengthen our competitive moats and go after that large white space in the BA market. We intend to do that three ways. First, we want to continue to enhance our ATG network by rolling out GoGo 5G. 5G will allow us to aggregate our proprietary license spectrum with 60 megahertz of unlicensed spectrum to deliver a super-fast, high-performance link for our customers. I should note that our portfolio of 349 patents includes patents related to disaggregation technology. We made tremendous progress on 5G in the quarter. We completed critical design review and flight testing for our airborne antenna. We completed installation of all 5G core hardware and software in our data centers and successfully completed our first end-to-end call on the GoGoSIM. We successfully completed acceptance testing of our 5G base station antennas in preparation for test bed installation later this year, and we completed building our prototype 5G air cards in preparation of full airborne equipment prototyping also later this year. We're still on schedule for service launch in 2022, though as mentioned on our last call, we've had some production-related delays associated with a particular 5G semiconductor chip. Our schedule takes into account the chip manufacturer's current expectations on delivery timing and still projects service launch will take place in 2022. Our second strategic initiative is to drive penetration of our advanced platform. It gives us the ability to integrate future technologies into our customers' existing advanced installation at a much lower cost than buying and installing similar products new from some other supplier. In essence, advanced future proofs are customers' investment in our hardware by enabling us to add new products, new service levels, new spectrum, and even new networks, primarily with software upgrades as opposed to expensive in-aircraft hardware upgrades. For example, when LEO satellite networks and ESA antennas become available, GOGO would have the option of offering advanced customers access to those networks simply by adding a new ESA antenna on top of the plane. That antenna could plug into the existing advanced platform already installed inside the plane. Much like a Tesla, the rest of the LEO upgrade would be achieved with a simple software update to the advanced device already on board. Conversely, if a future competitor offers that same product, The customer will have to rip out existing equipment and install new hardware inside the aircraft at cost to the customer of hundreds of thousands of dollars and weeks of downtime. Google is not committed to a LEO plan, but this demonstrates the type of optionality we get with a relatively modest investment on our part from the Avance platform. To make this point even more clearly, when we upgrade Avance L5 customers to 5G, most of the upgrade will be software. The only hardware needed will be one small box and two new antennas that fit exactly where the old antennas fit on the outside of the aircraft. Needless to say, we're very bullish on Avance. The flexibility to adopt and integrate new technologies as it evolves builds competitive moats around our current market position and also gives us the ability to attack new markets outside of North America. What was exciting about Q1 for Avance was that we grew units online 42% year-over-year to 1,900 units, or 32% of our total aircraft online, up from 23% in Q1 2020. Our third strategic initiative is around supply chain and manufacturing. In order to drive down costs and enhance quality, we simplify our supply chain by mandating common componentry across all advanced devices, whether it's our low-cost L3, our fully featured L5, or our future 5G. By mandating common componentry, we drive down the number of SKUs we need to source, thereby driving up the quantity we purchase of each SKU. This then lowers unit costs and drives up quality by simplifying our inbound logistics and manufacturing. This has proven especially valuable this year. as we've been able to minimize supply chain risk in the face of a dramatic increase in demand during a global supply chain crisis. Currently, we feel that we have enough supply to meet our increase in demand for the next several quarters. Let me finish on the refinancing front. In early 2020, we outlined our value creation roadmap for GoGo. It focused on, first, managing our business through the severe impact of the COVID-19 pandemic. Second, completing the sale of the commercial aviation business. And third, executing a comprehensive refinancing to enhance our financial flexibility and position the new GOGO for growth. With the closing of our refinancing last Friday, we've delivered on all three prongs of that plan. Our refinancing was an overwhelming success. We achieved approximately $70 million a year in annual cash interest savings, as opposed to the $50 million we had originally targeted. As a result of now having a clear picture of our debt service obligations and given the strong performance of the business, we are now sharing long-term free cash flow guidance for the first time. And Barry will provide more detail on that guidance in just a moment. There are several other very positive aspects of our refinancing that are worth noting. By borrowing the term loan B market, we achieve flexibility to refinance, to delever, or to pursue strategic transactions in the future as we see fit. Second, with $200 million of liquidity and our significantly enhanced free cash flow, we'll be able to invest in deepening and widening our competitive moats and in further delevering our balance sheet. And third, in Q3, We expect to achieve a major milestone when we turn net income and earnings per share positive for the first time and become what my dad would call a real company. That's an exciting milestone for GoGo. Now let me make a few concluding remarks. First, I'd like to welcome Mark Anderson of GTCR to our board and welcome GTCR as a partner in the GoGo business. GTCR added tremendous value throughout our refinancing process Because they've had investments in other business aviation companies, they bring valuable BA experience to our board. So welcome, Mark. Last, at GOGO, we are very excited about the opportunity ahead of us as we leverage our ATG network, our leading innovative advanced platform, and our strengthened balance sheet to drive growth and value creation for our employees, our customers, and our shareholders. And with that, I'll turn it over to Barry.