Gogo Inc.

Good day and thank you for standing by. Welcome to the second quarter 2021 GoGo Incorporated earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. And to ask a question during the session, you will need to press star 1 in your telephone. If you require any further assistance, simply press star 0. I would now like to hand the conference over to your speaker today, Will Davis, Vice President of Investor Relations. Thank you, and please go ahead.

Thank you, Myra, and good morning, everyone. Welcome to GOGO's second quarter 2021 earnings conference call. Joining me today to talk about our results are Oakley Ford, Chairman and CEO, and Barry Rowan, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on 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 August 5th, 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 second quarter earnings release. This call has been broadcast on the Internet. and available on the investor relations website 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 thanks all of you for joining us this morning and for your interest in GoGo. Our second quarter results demonstrate strong momentum as we execute on our pure-play business aviation connectivity strategy. Demand for BA in-flight connectivity is accelerating. Our advanced platform is perfectly positioned to take advantage of that acceleration, and our vertically integrated business model is converting that demand into sustainable, very positive bottom-line performance for GOGO. My remarks will focus on, first, highlights of our second quarter financial results, including demand metrics for the business aviation connectivity market. Second, a discussion of GOGO's merits relative to potential competitors. Third, an update on progress against our strategic initiatives. And fourth, I'll discuss our guidance and share some thoughts on how we think investors should look at our equity. Gary will then dive into the numbers and discuss our RAISE 2021 guidance. give a little preview of 2022, and share our expectations that we will exceed the five-year revenue-free cash flow guidance we've previously provided. Let me start with a brief overview of our quarterly results. We delivered strong revenue of $82.4 million, up 16% from pre-COVID Q2 2019, up 51% from Q2 2020, and up 12% sequentially from Q1 2021. We achieved record service revenue, driven by significant increases in both ATG Aircraft Online, AOL, and Average Revenue Per Unit, ARPU. On the AOL metric, we cracked the 6,000 aircraft carrier for the first time, and on the ARPU metric, we hit $3,195, just $5 short of our all-time high. What's most exciting to us right now, though, is what's happening with equipment sales, driven by the popularity of our Advanced L5 platforms. which is doing a great job meeting the demand of today's connected passenger around streaming, file sharing, and video conferencing. While advanced revenue and shipments are strong for the quarter, advanced orders for Q3 and Q4 are even stronger, and orders for 2022 are looking like they'll be even stronger than 2021, all of which will have long-term benefits for GoGo. I'll go into the industry drivers behind this demand in just a minute. But the important takeaway here is that these equipment units will drive high-margin, very sticky service revenue streams for many years to come. This revenue is sticky because changing out connectivity equipment on a business aircraft is expensive and even worse, time-consuming. As a result, we have a very low equipment churn rate, about half a percent per month, which equates to a 17-year equipment life on an aircraft. We have reason to believe that advance will continue that condition of stickiness. We've designed it to minimize hardware upgrades in the future and relegated most enhancements to easy over-the-air software upgrades. For instance, to add LEO satellite capability, we'd have to add an antenna on top of the aircraft, but would not need to touch the interior of the aircraft at all. That upgrade would be pure software. For that reason, we're encouraged that Avance is continuing to grow as a proportion of our subscriber base, accounting for 33% of our service revenue in Q2, up from 25% in Q2 2020 and 32% in Q1 2021. Another positive data point around Avance was our just announced contract with Cirrus Aircraft for their VisionJet personal jet. This is solid proof that our small Avance L3 form factor and our lowered 3,000 foot service floor, which was achieved with just a software upgrade, is appealing to owners of smaller aircraft. Cirrus is a really exciting new partnership for us, and it's our first entry into the 200,000 aircraft general aviation market. And I'll discuss it a little more further in the call. On the bottom line, GOGO delivered adjusted EBITDA of $36.7 million, an increase of 56% from pre-COVID Q2 2019, increase of 70% from Q2 2020, and 8% from Q1 2021. The second quarter performance reflects the overall strength of our business model, a leading market position, and positive industry trends. I'm very proud of the GOGO team. I want to thank them for what we accomplished in the quarter. We're on the right track, and our second quarter report tends very good things to come. Now let me turn to the business aviation industry demand drivers. The business aviation market has clearly shifted out of recovery mode and has moved into high growth mode. The flight count on GOGO equipped aircraft for Q2 ran at 13% above the flight count for Q2 2019, as opposed to Q1 when it ran 3% below the flight count for Q1 2019. We hit all-time highs for flight count several days in the quarter and broke 5,000 flights in one day for the first time. More importantly, flight activity ran above pre-pandemic levels in every segment except corporate. And by the end of the quarter, even the corporate segments recorded flight counts above 2019 levels. Interestingly, the size of the gap between 2019 and 2021 monthly flight activity improved sequentially for every month of the quarter, for every segment of our business. And this continued even through the first month of Q3. For the entire fleet, flights in April were up 6% over flights in April of 2019. Flights in May were up 11% over flights in 2019. Flights in June were up 23% over flights in 2019. And flights in July were up 26% over flights in 2019. Flight count growth within the year has been substantial across all segments as well. The July corporate flight count up 53% from January, with charter flight counts up 46% from January and fractionals up 36% from January. Given that international travel is still difficult, some of the larger corporate flight departments are still well below their 2019 flight levels, and we expect the corporate segment to grow even more significantly once the global economy fully reopens. The big question on everybody in the BA industry's mind is, will this heavy traffic continue? Recent market data suggests that it will. A July survey of more than 225 private flyers by the online publication Jet Card Comparisons showed that 69% of passengers expect to fly private aircraft more frequently post-COVID than they did before COVID. 28% expect to fly private aircraft at similar levels, and only 3% expect to fly private aircraft less often than before the pandemic. For us, this increased demand for flights is positive because it drives demand for aircraft. Given that the fleet of pre-owned aircraft for sale continues to hit all-time lows, that demand is increasingly turning to purchase of new aircraft, which sells opportunity for GOGO. Some evidence of these trends include Gulfstream announcing that its book-to-bill ratio hit 2.1 in Q2, up from 1.3 in Q1, and 1.25 for their 10-year average. TechStrong, just announcing that their book to bill was very close to two, considerably higher than the 1.6 they announced in Q1. And NetJets, announcing that they're pulling forward aircraft acquisition wherever possible, delaying aircraft retirement and planning to spend $2.5 billion and 100 additional aircraft to arrive by the end of 2022. New aircraft orders are good for go-go because most new jets are now delivered with IFC, And given that we are line set at all nine business aviation OEMs, we are very well positioned to get our fair share of those orders. The other big revenue driver for GoGo right now is the rapid increase in the amount of data consumed by passengers as they use more data-intensive applications, such as streaming, file sharing, and video conferencing. Across our entire fleet, customers consumed 52% more data in Q2 2021 than than they did in Q2 2019, driven by a 26% increase in megabytes per flight hour and a 20% increase in flight hours per day. Data consumed across large and charter and fractional flights actually nearly doubled over 2019. To meet that demand, in the second quarter, we launched four streaming plans for advanced customers, including our new limitless streaming plans. We've sold more than 50 of those streaming plans so far, driving an increase of $193 per month per advanced aircraft online. This is a great example of how we can easily add enhanced products and services on top of our advanced platform to drive incremental revenue. I think it's also worth pointing out how well positioned GoGo is to meet this increased demand for data. First off, we have advanced. our hardware and software platforms for accessing our network. Avancys significantly improves the speeds at which data is delivered inside the aircraft compared to our old classic products. Think of that as us improving your cell phone hardware and software that accesses your cell network. Second is our 4G network itself. In 2017, we had 1,500 mainline commercial aircraft with more than 100 passengers each accessing our ATG 4G network. Today, there are only roughly 200 mainline aircraft left on the network. That has freed up a tremendous amount of capacity and dramatically improved performance. Today, we're consuming one-third the number of terabytes of data per day as we were in 2017, which significantly improves the customer experience. The convergence of these strong supportive trends and our ability to meet that demand with the right product creates tremendous momentum as we continue to focus on driving profitable growth. Now I want to take a moment to comment on the competitive landscape and our strategy to maintain GoGo's leading position. The competitive threat investors ask us about the most are potential entrants, namely satellite companies launching low Earth orbit satellite networks and SmartSky, a startup that's been promising to launch a competitive ATG network since 2014. Let me start with LEOs. As I said before, we view them as an opportunity, not a threat. To close the business case on the vast amount of capital they need to invest to launch those constellations, they are focused on finding partners that can produce the fastest path to revenue. And in the BA market, we are by far the fastest path to revenue. ESA antennas, electronically steerable antennas, are a necessary precondition to accessing LEO constellations. And with the multi-barrier capability we have in the advanced platform, we can easily add an ESA on top of the aircraft and leverage advanced for all the workings inside the aircraft, thereby dramatically lowering the investment and time required to install the system. To add ESAs will take modest amendments to our current FTCs, but would give a LEO partner access to a vast fleet of aircraft, including our entire advanced install base. which by the time LEOs are aero-ready would be by far the largest ISC installed base in the world. Also, all of the aircraft for which we have advanced STCs in the aftermarket, which is virtually every major model of aircraft. And finally, line fit at all nine OEMs, where advanced is already line fit today. We continued to develop plans around that opportunity, and in Q2 tested the idea with some of our most knowledgeable customers. Their reaction was overwhelmingly positive. They would love to buy their ATG and satellite connectivity from one provider and have it all be part of one integrated solution on the aircraft. For us, the EO capability would give us an attractive product for the heavy jet market in the USA, and it would give us access to the 14,000 aircraft in the rest of the world market that we do not address today. The other competitive threat people raise is smart size. an aging startup that has raised and spent more than $300 million trying to build a competitive ATG network. Based on our knowledge of ATG economics, we spent a lot of time modeling their financials and think it's very hard to justify a business case for the investment needed to complete their network and then fund operating losses after they light that network up and try to ramp revenue. In GoGo's case, we had a profitable North American commercial aviation business that funded build-out of the network and our operating losses as we ramped our DA revenue. NorthSky has been taking a lot of pot shots at GoGo in their recent fundraising, and we believe they have misrepresented our capabilities, especially around data speeds and customer support. So first, on network, we believe we have a superior network today and will have a vastly superior network when we launch 5G. because they will rely on unlicensed spectrum, which faces significant interference from ground-based usage like Wi-Fi, Bluetooth, et cetera. While we also plan to use unlicensed spectrum for our 5G network, we will aggregate that spectrum with our 4 megahertz of licensed spectrum, so that we will always have a clean signal. To be clear, both networks should perform very well where there is no ground interference. However, we believe ours will perform better where there is interference. Our network will also be 5G from end to end, whereas their network will be 4G LTE with, quote, unquote, elements of 5G. The network will only go as fast as its narrowest bottleneck. With a 100% 5G pipe, we should be able to transmit more data more efficiently than a 4G LTE pipe with 5G elements. We're also constantly enhancing our network, and have made enhancements we believe they do not offer, such as lowering our coverage floor to 3,000 feet. The coverage map on their website starts at 10,000 feet. We also believe they've made some miscalculations in developing their equipment. Their mainline product will require both a roughly 30-inch and a roughly 15-inch antenna be attached to the bottom of the aircraft. Whereas for L5 and 5G, we require two 13-inch antennas, so 45 inches versus our 26 inches. Aircraft real estate is very important in the business aviation market. We think they face some significant challenges there. Finally, they've been critical of our customer service. That surprises us. GOGO has been ranked number one in the AIN product support flight deck avionics and cabin electronics category for eight out of the last ten years and was second the other two years. In a survey last year, 90.3% of GOGO customers' respondents agreed with the statement that it's easy to do business with GOGO. And our transactional NPS, which rates customers' feelings about our customer service, runs consistently between the mid-60s and the mid-80s. And those are world-class numbers in net promoter scores. SmartSky also weighs their patent portfolio as a competitive advantage over GoGo. First off, we have a larger patent portfolio than they do. But more importantly, our attorneys and engineers have reviewed all 144 of their United States patents in detail. And our attorneys advise us we do not infringe any valid patent SmartSky owns. It's worth noting that most of their patents apply to older technologies, and none even mention 5G. In fact, if SmartSky did try to assert its patents against GoGo, many would likely be invalid because they encompass systems GoGo has used in many cases for years, if not decades. So to conclude on competition, I think we are confident but not complacent. that we can remain a leader in the BA IFC business for years to come. We have a solid business now that generates free cash flow that enables us to continue innovating to create value for customers and shareholders. Now, let's talk briefly about our progress on the strategic initiatives I discussed on our last call. Remember, we have a three-pronged strategy. First, to invest in improving the performance of our APG network to keep pace with customers' on-ground expectations. and drive penetration of our advanced platform. The key initiative under this prong right now is to deploy our 5G network in the second half of 2022. The second prong is to layer in new products and services on top of advanced to add incremental revenue, improve performance, deepen our competitive moat, and add to our total adjustable market. The third is to adhere to our advanced platform hardware strategy to drive down costs and quality up. The primary initiative here is use of common components across all of our products, including L3, L5, or 5G. As illustrated today, roughly 80% of the components in those three products are the same, which means we can drive higher volume purchasing, get lower prices, and manage quality more efficiently than if we use different components in each product. This may sound boring, but it drives tremendous value for customers and for GoGo. I would note that the value of this last prong of our strategy has been especially useful this year, as having more meaningful supplier relationships has enabled us to respond to a 30% increase in unit demand and raise revenue guidance significantly, despite a global supply shortage. Now let me report on the progress against the three prongs, starting with GoGo 5G. There are four major components to our 5G product, and we've made significant progress in each, starting with the aircraft antennas. That has completed flight testing and is headed for qualification testing in Q4. Next, the 5G base station antennas. In the quarter, we hung and tested our first array and will now head into Q4 for installation of our seven tower testbeds. Next, the 5G core, which is the data center and all the backhaul. That is complete and ready to go. Nothing left to do there except for integration testing. And finally, the 5G airborne LRU, or the small box that sits next to a Vance on the plane and houses our air card. We have completed the prototype of this LRU and have tested and have started pre-qual testing. However, as we discussed in our last two calls, we have had a delay in delivery of a 5G semiconductor chip that goes inside this box. All the technology on that chip that supports GOGO has completed testing and is ready to go. The chip itself was delayed to accommodate addition of new functionality for another customer. That new functionality has now passed design and yield testing, so it should be on track for us to deliver commercial launch of GoGo 5G in second half of 2022 as promised. Now let me touch on how we're layering new products and services on top of our flexible advanced platform. That's the front two of our strategy. There are a couple good examples of that in play right now. The first is 5G itself. The hardware portion of the L5G upgrade is designed to be easy and inexpensive. We'll replace the two L5 antennas with two 5G antennas that fit in the exact same attachment points as the L5 antennas, and we'll add a small box next to the advanced box inside the aircraft. Other than that, the entire upgrade is software, just like a Tesla. The second example of layering additional customer benefits in our advanced platform is the Cirrus contract. One of our goals is to leverage Avance to grow our total addressable market. Using Avance's common componentry, we've developed a small L3 form factor, and with a software upgrade, we were able to lower our service floor to 3,000 feet from 10,000 feet, both of which appeal to service for their G2 Plus VisionJet personal jet. Sears will offer L3 line fit on the VisionJet. And VisionJet is an entirely new market for us, the 200,000 aircraft general aviation market. And this is a great example of the growth afforded to us by the flexibility of the advanced platform. The third example of layering on top of advanced is the limitless streaming plan and the other three streaming plans we added, we introduced in April. We were able to spot a market trend and with a simple software upgrade, capitalize on that by quickly rolling out four new service plans that gained rapid market traction. And as I noted earlier, I've already made a big impact on our advance article. To sum it up, the flexibility of advance combined with our strong install base and deep distribution relationships gives GoGo the ability to react quickly to market and technology changes that drive value for customers and shareholders. Now, let me finish with a few words on our financial guidance and our long-term targets. Based on the strength of our first half performance and strong momentum going into 2022, we're raising our full year 2021 revenue, adjusted EBITDA, and free cash flow guidance. We also believe that the strong AOL growth driven by our current event sales bodes extremely well for future service revenue growth, and hence believe we will grow our revenue at the upper end of the 10 to 15% range in 2022. We also think go-go stock is underappreciated at current valuations. We have a large, unpenetrated market poised for growth. We have deep and wide competitive moats. We have a diversified and high-quality customer base. We have high switching costs and low churn. We have high equipment retention rates. We have positive industry tailwinds. We have a strong EBITDA to cash conversion. We are cyclically resilient, as demonstrated in COVID. and we make money on new customer acquisition rather than having to come out of pocket to add new customers. We see companies that have similar characteristics trading at double our current adjusted EBITDA multiple, which adds to our conviction that GoGo represents a good opportunity for investors. With the strong support of our team, lenders, and partners, we're excited to continue executing on our strategy and leverage our vertically integrated model and strong balance sheet to drive continued growth and value creation. Our focus remains on continuing our momentum, capitalizing on opportunities as the business aviation market accelerates, and delivering for our customers and shareholders. GoGo's future is bright, and with that, I will turn it over to Barry.