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.

Thanks, Oak, and good morning, everyone. The dramatic recovery in the business aviation market, coupled with accelerating demand for connectivity, enabled us to deliver record results for this quarter. The fundamentals underlying these results provide a solid foundation for driving future performance in at least three ways. First, as more aircraft come online, this translates into recurring service revenue that comprises approximately 90% of our gross profit and represents the source of our exceptionally high lifetime customer value. Secondly, the increasing demands of the data-connected passengers are driving continued ARPA growth. as customers more fully leverage the capabilities of our future-proof advanced platform. And thirdly, the strong demand has resulted in record backlog levels, which further de-risks our projections. In the second quarter, we set new records for both service revenue and adjusted EBITDA. The tremendous year-over-year growth we experienced this quarter is certainly skewed by the comparison to the depths of the pandemic in the second quarter of 2020, but even on a normalized basis, the growth rates are very meaningful. As I walk through our second quarter financial performance in more detail, I'll note, as we did in our press release this morning, comparisons to the second quarter of 2019, which will provide more normalized comparisons. At the end of my remarks, I'll also provide an update on our ongoing GOGO 5G investment, as well as some additional context for our long-term outlook and guidance. GOGO generated total revenue of $82.4 million in the second quarter, an increase of 51% compared to the second quarter of 2020. Total revenue was up 16% from the pre-COVID second quarter of 2019, and revenue continues to ramp coming out of COVID. Total revenue was up 12% sequentially from the first quarter of 2021, driven by increases in both service and equipment revenue as demand continues to exceed our expectations. GoGo achieved record service revenue of $64.8 million with 47% year-over-year growth from the second quarter of 2020, 18% growth from the second quarter of 2019, and 9% sequential growth from first quarter's record service revenue. This growth was driven by an increase in both ATG Aircraft Online, which we refer to as AOL, and average monthly connectivity service revenue for ATG Aircraft Online, or ARPU. Recurring subscription-based service revenue is an important long-term value driver for GoGo. Service revenue has grown by at least 13% per year every year since 2010, except for the COVID year 2020. And even during COVID, our service revenue for the full year 2020 was down just 4% compared to 2019, a testimony to the robustness of our subscription-based model. To further unpack the drivers of service revenue, Second quarter ATG Aircraft Online was 6,036, up nearly 12% year-over-year and up over 2% sequentially. This was the result of new customer activations and continuing reactivations by existing customers as flight activity continues to grow to well above the pre-COVID levels, as Oak described in detail. We also achieved record ARPU of $3,296. representing 28% year-over-year growth and approximately 7% sequential growth. Our second quarter ARPU reflects the benefit of recognizing $1.8 million in deferred revenue related to a customer contract, which we don't expect in future quarters. However, even excluding the impact of this deferred revenue, ARPU increased 4% sequentially to $3,195, and it was very close to our all-time high ARPU, as I've explained. Demand for data continues to grow as passengers increasingly view their aircraft as an extension of their living rooms and offices. We also recognize $1.5 million in service revenue from the network sharing agreement with Intelsat during the second quarter. As we previously described, service revenue from the Intelsat agreement ramps over time, particularly after GoGo 5G is deployed. However, even with this expected ramp, the revenue derived from this relationship represents less than 5% of GOGO's annual revenue. Looking ahead, we expect continued sequential revenue growth throughout the second half of the year. Our upwardly revised revenue guidance reflects our expectations that service revenue for the full year 2021 will grow approximately 20% over the full year 2020. Turning now to equipment revenue, as Oak mentioned, GoGo delivered outstanding equipment revenue of $17.6 million, an increase of 66% year-over-year and 21% sequentially due to increased demand for Advanced L5 and L3 units. We've been saying for some time that expanding penetration of the Advanced platform into both our installed base and with new customers is a centerpiece of our long-term strategy. In the second quarter, we continue to advance that strategy and expand the advanced real estate as all of GOGO's new equipment sales were advanced L5 or L3 systems. Total advanced units online for the second quarter of 2021 grew 51% year-over-year to 2067. Advanced units comprised more than 34% of total ATG aircraft online as of June 30th, 2021, up from 25% as of June 30th, 2020. Our advanced L3 product provides an attractive lower cost entry point. Our advanced L5 product has the additional advantage of enabling a seamless upgrade path to GoGo 5G. L5 shipments are running at approximately 60% of total advanced system shipments this year. We expect the seasonality we've experienced over the past several years to continue in 2021. with equipment revenues backloaded to the second half of the year and strongest in Q4. We therefore expect continued sequential growth in equipment revenue for the third and fourth quarters of this year. In addition, as I've mentioned, we have a robust backlog of equipment orders, totaling more than our projected shipments for the balance of this year and stretching into 2022. This significantly de-risks even our upwardly revised guidance for this year and provides great momentum going into 2022. Of course, as this equipment comes online, it translates into the recurring service revenue that drives our long-term model. Our increased revenue guidance reflects a 20% to 30% increase in equipment revenue for the full year of 2021 as compared to the full year of 2020. This is based on the underlying strength of the market as well as the seasonal dynamics of our business. We're implementing a series of operational measures to meet this higher-than-expected demand. Importantly, we have managed our supply chain to position us to deliver on the higher equipment forecasts reflected in our updated 2021 guidance. Over the past several quarters, we have worked to expand our manufacturing capacity and ease supply chain constraints brought on by the pandemic. This includes deploying our strength and balance sheet to support our suppliers by committing to larger quantities of materials and in selected cases prepaying to get ahead of new orders. We're also remarking approximately $10 million in cash for additional inventory purchases during 2022 to ensure we meet demand and to reduce our quoted lead times. Strategically, we have designed our offense platform with a significant amount of common componentry across the various product offerings, which simplifies our supply chain challenges, as described. We will continue to pursue creative ways to work with our suppliers and enhance our capacity to capitalize on this strong demand, bring more equipment online sooner, and start the value-driving cycle of our recurring revenue model more quickly. Let's now turn to a discussion of profitability for the quarter. GoGo delivered service margins of 77% in the second quarter, an increase of 100 basis points sequentially. The increase was driven by record service revenue, which, as I mentioned, also included the deferred revenue that we don't expect in future quarters. As we said previously, we anticipate service margins to decrease somewhat throughout 2021, mainly due to increased data center and network operations costs, some of which are related to 5G. On the equipment side, margins increased 400 basis points year over year to 38% in the second quarter, but declined from 43% in the first quarter of 2021. The sequential decrease in equipment margin is primarily due to the mix of L3 versus L5 shipments in the quarter. We continue to expect equipment margins for the full year of 2021 to be above the 2020 levels. However, we expect the percentage in the second half largely due to mix. It's important to note that while equipment margins are lower on the less expensive L3 product, service margins are quite similar across the two product offerings, which of course is most important for our overall business model. Our L3 product is also delivering on its strategic objective of penetrating the market for smaller airframes as demonstrated by our recent Cirrus announcement. In terms of operating expenses, GOGO's second quarter combined engineering design and development, sales and marketing, and G&A expenses of $23.1 million increased 35% year over year. This increase was driven by two factors. First was an increase in sales and marketing expenses this quarter, which were significantly reduced during the COVID period a year ago. Second was a reversal of our bonus accrual that occurred in the year-ago quarter when we were not certain we would pay a bonus as the pandemic took hold. You recall that our plan to forego this bonus was one of the 16 cost reduction levers we activated during COVID. Looking ahead, we now expect G&A to decrease in 2021 relative to 2020 versus our previous expectation of G&A remaining approximately flat year-over-year. We remain on track to deliver our targeted $10 million reduction in G&A, excluding non-cash stock-based compensation, from the 2020 level by the end of 2022. In fact, we are currently running ahead of schedule, despite some transition costs related to the Intelsat transaction. Now shifting to an overview of our GoGo 5G program, We expect spending to ramp during the balance of this year in anticipation of our 2022 launch. We spent $1.5 million in total 5G development and deployment costs in the second quarter, the majority of which was in OpEx. We expect to spend $17 million in the second half of the year, split approximately 50-50 between OpEx and CapEx. We've shifted about $5 million of 5G spend to 2022, which results in a $2 million reduction in OpEx and a $3 million reduction in CapEx for this year. This shift is reflected in our updated adjusted EBITDA, CapEx, and free cash flow guidance for this year. While the timing of the GoGo 5G program investment has shifted modestly, our expected deployment schedule remains unchanged. We are on track for our GoGo 5G deployment in the second half of 2022, based on the significant program milestones we have achieved, which Oak outlined. We continue to anticipate about $100 million in overall GoGo 5G spend from 2019 through 2023, with over 90% of this investment completed by the end of 2022. With our business now generating strong cash flow, we expect to be in a position to fund the entire amount of the GoGo 5G CapEx out of internally generated cash flow. In fact, just one year of the $70 million in annual interest savings from our recent refinancing exceeds the anticipated total CapEx spending for the 5G program. After GoGo 5G is launched, we expect ongoing capital expenditures in the $15 to $20 million range annually. supporting an even stronger adjusted EBITDA to pre-cash flow conversion rate in 2023 and beyond. This combination of accelerating top-line growth and continuing financial discipline translated into very strong bottom-line performance in the second quarter. GoGo delivered adjusted EBITDA of $36.7 million in the second quarter, a new record. This represented an increase of 17% from Q2 2019 to a 70% year-over-year increase, and an 8% increase sequentially. Given the resurgence and growth of the market and GOGO's demonstrated ability to translate top-line growth to the bottom line, we have increased our adjusted EBITDA guidance for 2021. And as we look ahead, positive net income is just around the corner. GOGO is at an exciting inflection point as we expect to achieve sustainable positive net income beginning in the third quarter of this year. Free cash flow for the quarter was an outflow, as expected, of $16 million. This was in spite of a significant increase in adjusted EBITDA as it reflects our last legacy interest payment under our old financing terms. For the six months ending June 30, 2021, free cash flow was a positive $7.8 million increase compared to a negative $6.3 million in the prior year's six-month period. With our refreshed balance sheet now in place, we expect to generate positive free cash flow for the remainder of the year. Given our expectations for revenue and adjusted EBITDA in 2021, we also raised our free cash flow guidance for this year. It's gratifying to see how our recent, highly successful refinancing, enabled by the strength of our business model, has created a step change in GOGO's ability to generate shareholder value. Before I say more about guidance, I'll provide a quick balance sheet update. GOGO is in a very strong liquidity position with $109.2 million in cash on hand as of June 30th, and we have not drawn on our $100 million revolver. As of the end of the second quarter, we had approximately $828 million in outstanding debt, including the $725 million term loan B we recently put in place and approximately $103 million in outstanding convertible notes. As we've spoken about previously, our convertible debt will mature in May of 2022, and we plan to settle any additional conversions with equity, which would further reduce our leverage ratio and streamline our capital structure. We are well positioned to build on our enhanced financial profile and strong market position to drive long-term shareholder value based on an attractive, actionable investment thesis. GOGO's strengthened free cash flow profile is supported by multiple factors, including a recurrent service revenue model, attractive adjusted EBITDA margins, low ongoing CapEx, particularly once we deploy GOGO 5G in 2022, a material interest expense reduction from our recent refinancing transaction, and significant deferred tax assets, which have an after-tax value of nearly $300 million at today's tax rate. Based on the significantly reduced interest expense resulting from our recent refinancing and the strength of the current and projected business trends, we continue to assess whether we need to maintain all or part of the valuation allowance on these deferred tax assets. it's quite possible that a reversal of our valuation allowance could occur within the next 12 months. Let me now spend a moment highlighting our capital allocation considerations in light of our strengthened balance sheet and improved financial profile. We will continue to pursue a balanced capital allocation strategy focused on four primary areas. First, enhancing our network through the deployment of GoGo 5G. Second, further reducing overall leverage. Third, strategically investing in our business in ways that capitalize on market opportunities or further strengthen our competitive position, such as the global broadband opportunity Oak described. And fourth, over the longer term, considering returning capital to shareholders as appropriate. With that, I'll provide some additional context on our guidance, which we updated this morning. We increased our full year 2021 financial guidance based on the healthy business aviation market conditions we're seeing and our continuing strong financial performance. We now expect to deliver full year 2021 total revenue in the range of $325 to $335 million compared to our previous guidance of $310 to $325 million. Adjusted EBITDA of at least $130 million. This compares to the $105 to $115 million in adjusted EBITDA guidance we provided in March, and to the $115 to $125 million we increased this guidance to on our first quarter call. Capital expenditures in the range of $20 to $25 million, with the majority tied to GOGO 5G. This compares to our previous guidance of $25 to $30 million. Free cash flow in the range of $25 to $35 million, compared to our previous guidance of $10 to $20 million due to increased adjusted EBITDA and reduced capex. As a reminder, all guidance is for the full year 2021. And our expectation is that revenue will be weighted toward the second half of the year, particularly in the fourth quarter. Adjusted EBITDA is expected to taper in the second half as a function of our increasing Virgo 5G spend and the timing of other expenses. We've also grown more optimistic about our longer-term growth and free cash flow targets. We previously stated that we expected at least 10% compounded annual revenue growth from 2020 to 2025. Based on the strength of our equipment sales and the resulting impact to service revenue, we see an acceleration in this growth rate and now expect total revenue to grow at a rate in the upper end of a range between 10 and 15% for the full year of 2022, versus 2021. Based on these expectations for increased top-line growth, we now expect free cash flow of more than $100 million for the full year 2023, following the deployment of the GOGO 5G network in 2022, with significant free cash flow growth thereafter. We continue to target adjusted EBITDA margin of 35% to 40% throughout the planning period. We will be updating our long-term targets as we refresh our five-year model in the course of our planning process in the months ahead. Before we open up the call to Q&A, I want to congratulate the entire GoGo team on their fantastic work during the second quarter. The focus and resolve of our superb team will continue to ensure we capitalize on the tailwinds in the market, deepen our competitive moat, and create value for our customers and shareholders. That concludes our prepared remarks. Operator, we're now ready for our first question.

Thank you. At this time, we would like to take any questions you might have for us today. And as a reminder, to ask a question, you will need to press star, then the number one on your telephone keypad. Once again, to ask a question, please press star one. To withdraw your request, you may press the pound or hash key. We'll pause for a moment to compile the Q&A list. We have our first question comes from the line of Scott Sherrill from Lost Capital. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my questions. Congratulations, guys, on a great quarter. Difficult operating environment for the rest of the world, but you guys are excelling in terms of what you are posting. Hey, maybe quickly to dive in on the guidance this year from an EVA dot perspective, you kind of touched on a couple of items where there were some one-time sales contributions related to deferred revenue as well as the ramping 5G costs. But even taking that into account, it seems like the $130 million for the second half of this year, you know, implying that it's the second half of this year, seems like it's conservative. Is there something else going on there or – Are you guys really just taking a conservative view of the world into the second half of this year?

Yeah, Scott, as you said, it's at least $130 million. So, you know, we certainly expect to be above that number. And the primary drivers of this are really kind of three factors to consider. One is the majority is due to 5G. That is the majority of the tapering in the second half versus the first half. Secondly is that there are some increases in other expenses, like we're planning an increase in sales and marketing, light up the current market environment. So these increases more than offset the increase in gross margin that we expect to see due to the higher revenues. So I think we've tried to highlight the primary issues, and, again, we may be being a bit conservative, but, again, it is at least $130 million.

Gotcha. Helpful. And if I could, as a follow-up – You know, looking at the broader macro demand picture, it seems like it's exceedingly high. I'm wondering if you could talk a little bit about what you think the overall installation capacity is out there within the marketplace. Is that going to be a limiting factor? Are there some things that you can do on that front? Because that really seems like it could be the one gating factor out there besides component availability as we start to get into 22 and 23. And maybe as well, if you could, Oak, I'd love to hear you touch a little bit on early thoughts on the general aviation market kind of timing and and pricing that you would see going into that, and maybe something related to the timing of some of your LEO partnerships. Thanks.

Yeah, in terms of capacity, it's a great question, Scott. Right now, we think that there's ample capacity to hit our projections, obviously, but we are spending a lot of time actually sort of deep diving on that and trying to figure out, okay, our market is relatively unpenetrated. Why is that, and what are the inhibitors, and how can we break those inhibitors down and accelerate our advanced penetration. So that's actually a work in progress for us in terms of deep analysis. I would say this, you know, we are going advanced very quickly and that we're going at 50% rate. So that's on what's already a fairly large number. There's more advanced installations in the world than any other business aviation IFC platform. So other than our old one. So we are going quickly, but we'd like to go faster. So that's your first question. The second part of your question, I know the last part was Leo. Generally... Yeah, so general aviation, yeah, it's a very large market. The question is, you know, what is the revenue opportunity there for us? And, you know, we don't have a firm view on that. This is a... It's kind of a learning experience for us, and the deal we have with Cirrus is, you know, good for us from a financial perspective. We are selling, you know, we're selling them equipment at our regular price, and they're putting it on their jets, you know, as ordered by their customers, and then they have what I'd call sort of a macro service plan they sell to customers that includes a whole bunch of things. And now we'll include connectivity as well. And then they're paying us for the connectivity. So we're very happy with the deal. The, you know, the question is, are there other parts of the GA market that that might work? And, you know, we think there may be. You know, but there are clearly out of 200,000 aircraft, there are a lot that are probably not in the addressable market for us. So We'll give more guidance later as we learn more about this, but the good news is it has opened it up for us, and there are clearly pockets where our products will work. And then the last part, you know, we are in active conversations in the LEO and ESA worlds, and, you know, I don't think we'll want to get over our skis in terms of giving any guidance on timing of anything. I think the important takeaway is that for these guys, speed to revenue is the most important thing. They've got to be able to build business cases that show them getting rapidly to revenue. And when you look at the BA market, and if you understand our advanced platform, you know, it's no question that we're the fastest way to revenue. So I think that, you know, we'll have a good hand to play with the layout providers, and, you know, we're going to continue our conversations and see where it leads us.

Thank you. Great quarter. Thanks, Scott. Thanks, Scott.

Our next question comes from the line of fans, Vitonza from Colin. Your line is open. Please go ahead.

Hey, guys. Thanks for taking the questions. Nice growth on the advanced units. Can you break out how many of the L5s you have installed today and how that compares with three months ago?

Barry, I think you have those numbers handier than I do.

Yeah, so we studied some of those, so the total L5s that we have installed, you know, 1,400 this quarter, and L3s are high 600s. So the sum of those gets to over the 2,000 number that we had cited. And that's the growth that we talked about, a lower 50% growth over last year and continues to build quarter to quarter.

And I think the last time we spoke, I think the L5 number was 1,300. So it seems like that continues to improve nicely as well. And then I guess, Oak, you know, no question that the industry is back, and we think it's going to be back for a long time. But you made a comment in your prepared remarks about how the return of international travel, which has still remained a little bit depressed, how that could actually – I think you said how that could help Google, but I'm not sure if I followed that because – You know, given that GOGO is domestic, given that it's air-to-ground, could you talk about how the return to international travel could be another tailwind for you, or perhaps I misheard you?

Yeah, no, you heard me right. A lot of those aircraft actually have ATG on them, and they use ATG until they get outside our coverage range, and then they flip to the international, the satellite service. So if you talk to the big corporate flight departments, almost all of them have ATG and satellites.

Okay, great. And then my last question, I guess, is you mentioned, you know, obviously line fit at all nine OEs. You're well positioned. I think the way you put it was to get your fair share of new installs. What would you say your fair share is? I mean, presumably it's something a lot less than the 90% of the installed base that you have today. But how do you think about, you know, what that fair share ultimately should look like?

Well, aircraft that are manufactured for international missions, you know, missions that are totally outside the U.S., are obviously not going to be part of our fair share, and that varies year by year, but that's a fairly large portion of what the OEMs produce. So you have to sort of focus on those that have either primarily or totally North American missions. You know, in the light and medium-sized jets today, we're probably, you know, honestly the only option, and so that's our fair share is very high. And then heavy jets, you know, most U.S.-based heavy jets, not all, but most will add an ATG system to their satellite system, so we get a fair number of those as well.

Great. Thanks, guys. Appreciate the questions. Thanks.

Thanks, Lance.

Our next question comes from the line of Rick Prentice from Raymond James. Your line is open. Please go ahead.

Thanks. Good morning, guys. Hi, Rick. Hey, a couple of questions. Yeah, going well. A couple of questions. Obviously pretty innovative on the supply chain management, which has been some issues out there, obviously. Any problems on the cost side? You guys said you mentioned – funding now, maybe ordering inventory early, but should there be any margin pressure from the supply chain issue in the short or medium term?

We haven't seen real piping pressure. You know, we are continuing really to look at now 2022 to drive the kind of changes that that are going to be necessary to meet that increasing demand. So we're doing some other kind of creative things. For example, we're providing our contract manufacturers with components to build our equipment that they can't secure on the open market. We're also putting 12- to 18-month demand on our supply chain that allows us to identify and address critical shortages well ahead of time. So we're really trying to get out ahead of it and managing demand whole supply chain and the internally rp system to levels that accommodate the higher demand that we're seeing so we have done some prepayments as i mentioned in very selective areas, and those are individually negotiated with the suppliers and the people that can benefit from that. But in that case, those are quid pro quo arrangements where we get something for doing that as well. So it's been a very, very active process, kind of component by component or vendor by vendor. And so far, so good for this year, but we're really trying to shorten the lead time quotes for next year because we're getting pressure from customers. that they would certainly like to be able to have the installations happening more quickly, and we'd love to have that happen as well.

Makes sense. Doing some innovative stuff there. Second, to continue along the lines of Scott asked on the LEO side, a couple of the gating factors could also be the STCs. Update us as far as when you think you need to work on some STCs, and also what is the status of ESAs out there that you're seeing?

I'd say it's about two years until there's a viable EFA for the business jet market. And that's across a couple different suppliers, I think, that are fairly far along in developing these technologies. In terms of the FTCs, until you have the antenna designed and ready to go, and you have a PMA from the FAA, You can't go get STC. So that would be a ways out.

Right. So as far as thinking of revenue opportunities, having discussions with LEOs is good. But as far as revenue opportunities, we need the ESAs and then the STCs kind of timelining it.

Yeah. Yeah. We don't look at this opportunity as something that is short-term in terms of being able to drive revenue, Rick. I mean, I think – you know, you're talking three, four, five years out. And we'll get more guidance and timelines as we, you know, form partnerships and have more concrete timelines.

Yep. And final one for me is with streaming services, significant consumption of data, you talked about how your 4G network got extra capacity with the mainline stuff coming off. But how should we think about any congestion sites out there? People obviously are consuming as much data as they can. As you design the 5G network, how should we think about how you manage congestion within the network?

Yeah, it's a key focus of our engineers. And, you know, it's all about network design and how you aim antennas and where you put them, et cetera. So, yeah, there's a whole very complex science around that. And I'm probably the least qualified person at GoGo to give you any detail around it. But, yeah, it's a significant consideration. And we plan hard for it and we build around it.

And as you think about what kind of build capacity you're building into this, what kind of annual growth in consumption are you assuming?

You know, I've grabbed consumption grows about 25% a year, and that's what we use for our projections going on out. But, you know, right now we have a lot of excess capacity. And... You know, we figure that today's network, we could handle three times as many jets as we have on aircraft, I should say, as we have on the network now and for several years out, including that growth. So, you know, we are not constrained in terms of our network, in terms of the number of aircraft we can handle. And, you know, with 5G, of course, we'll be able to significantly improve the speeds we deliver to those aircraft.

Great. Appreciate it, guys. Stay well.

All right.

Thank you. Thanks, Roy.

Our next question comes from the line of Phil Kosick from J.P. Morgan. Your line is open. Please go ahead.

Hi, this is Amir Razban. For Phil Kosick, thank you for the time. First off, what is GoGo hearing about SmartSky from its sales channels and install partners? And second, with the 5G build, What obstacles might there be to that second half of 2022? And could you go into why the $5 million of CapEx was shifted from 2021 to 2022? Thank you.

Yeah, I'll start with the SmartSky, and I'll turn it over to Barry for the 5G. You know, the dealers and MROs stopped taking SmartSky seriously a long time ago because they've missed so many dates. that they promised in terms of delivering their network that, you know, it's not worth taking them seriously. So that's number one. Number two, the dealers do not like the antenna and, you know, they nickname it the canoe because it's so big. Now there's, you know, there's benefits in a large antenna which is you get more power out of it and, you know, better signal. But the problem is, in business aviation, one has to be very careful about how one balances size and power. The way we've done it is we've got very large ground-based antennas. So we get the power out of our very large arrays for 5G, and we minimize the size of the antenna on the aircraft. And that's really driven by what the markets told us about antennas and what they're willing to put on an aircraft and what they're not. So... I think SmartStyle's got real challenges in the dealer network. I mean, the former CEO of SmartStyle comes out of Duncan Aviation, so he does, you know, know people in the industry, obviously. And they've been, you know, trying to form partnerships, you know, and they boast of a lot of partnerships. But, you know, when we talk to those same people, we don't find much substance there.

And Amir, on your question about the $5 million change in the program spend, so it's really not a $5 million CapEx push. It's the overall spend, and the result of that is some of that is shifting between OpEx and CapEx. Those things get kind of tweaked as you go through the process based on accounting standards and so on. So really what's happening is that we're matching the spend with the program planning as it evolves. It is shifting, you know, into early next year. So it's really pretty modest changes within the program. As we said, on the spend side, as we said, this is not affecting the delivery date, which is still in the second half of next year. So we continue to modify and continue to refine the program in response to, you know, kind of what we're seeing in the market. And it's really not development, but it has to do with flight testing and those kinds of things and just the timing of that.

Thank you. Thank you. Hey, operator, let's take one more question, please.

Sure. Our next question comes in the light of Louie DePalma from Louie & Barry. Your line is open. Please go ahead.

Louie & Barry, good morning. Morning, Louie. Morning, Louie. The topic of competition seems to be the overarching driver of the stock price recently. During the quarter, Gulfstream announced that it reached a milestone of 500 Inmarsat aircraft online. Inmarsat seems to be doing well in this business jet Wi-Fi market. Viasat also announced the win with FlexJet. Satcom Direct appears to be doing well. And all this took place and you were able to achieve robust revenue growth of 70%, even with several other vendors doing well. And so my question is, do you think that the business jet market for in-flight Wi-Fi is large enough to support multiple vendors? And do you need to maintain... 90% market share or 80% market share to grow in a double-digit range or a high single-digit range?

Let me jump on that, Louie. So, first of all, you know, the Gulfstream announcement by MRSAT has been using – we actually have 1,016 Gulfstreams with our equipment on them, so about double MRSATs. The – you know, we – We actually kind of cohabitate with Inmarsat. I don't, you know, view them as a direct competitor. And, you know, you'll find that most jets that are U.S.-based that have an Inmarsat system will also have a GOGO system. You know, at that end of the market, redundancy is important. And they also, like the quality of the ATG network went over North America and the fact that – you know, that it's cheaper than using the satellite product while they're over the U.S. So, you know, we really cohabitate there. I'd say Viasat is kind of lost right now. I mean, they don't have a global product yet. They presumably will when Viasat 3 gets launched, and then they will compete with Inmarsat. I mean, they have what I'll call sort of a super regional product. It's with their Viasat 2 product, and it's – you know, it can come down the market a little bit from where Inmarsat is into the super mids, and that's what that FlexJet deal was. But they really don't compete head-to-head with us. And, you know, I think they're sort of trying to, but they don't really have the right product to do it. It's a lot easier and cheaper to install us than Biosat. And frankly, you know, the service from L5 is comparable to what Biosat's delivering. So, People don't have a real incentive to – they're certainly not going to switch, and, you know, it's only on a new aircraft where we would compete head-to-head. You know, Satcom Direct is really a reseller of, you know, other satellite companies' products. So they're a very good service organization, and, you know, we have a lot of respect for them. But, again, they're sort of at the high end of the market, and, you know, again, we would cohabitate sometimes with satellite direct installs. So again, it's kind of the same as the story for Amarsat, if you will. So that's the competitive environment. The smart sky launchers, obviously, they will be a competitor. I think I talked a fair amount in the script about some of the issues I think they're going to face. Did you have any other more – did that cover what you wanted to cover, Louis, or did you have some other thoughts?

Well, related to what Lance was asking in terms of almost what percentage of new aircraft that come online are equipped from GoGo. And right now that number is probably, you know, very high. But, you know, if in the future for new aircraft, if instead of having, you know, a 90% market share of new aircraft, if you have a 60% market share of, new aircraft that come online, is that enough to continue supporting, like, 10%, you know, revenue growth?

So, first of all, we don't have nearly 90% of all the aircraft that come out of the OEMs because, you know, almost a very high percentage go overseas and they wouldn't put a GOGO on them. Think, you know, 30%, 40% go overseas. So they're not going to have GOGO.

Right.

And then, you know, there are different ways LimeFit works. I mean, sometimes you're an option, sometimes you're standard. You know, on the large, on the very large heavy jets, we're not, we're going to be an option. We're not going to be standard. And then on the, you know, light and medium-sized jets, we're, you know, we will typically more often be the standard offering. So, you know, but, you know, MRSAT, JX is going to be the, you know, standard offering on the large Gulfstreams, for instance, not us. So, you know, today... You know, that's why I say our fair share. I don't know exactly the numbers. It kind of varies. But we get maybe, you know, 40-ish percent of the planes coming off the line in total, something like that. We have our systems installed. So we actually have room to grow there. I'm not that worried about us shrinking. The other part of your question is, Sorry. Let me ask the other part of your question. Do we need an 80% or 90% market share generally to continue growing at 10%? And no, the answer there is no. The math is obvious because there's so much unpenetrated room in the market for us to grow that others can come in and grow as well, and we can still easily maintain our 10% growth rate. Remember, the end of our five-year planning model, which we shared on our year-end call, we projected a 10% plus growth rate through the five-year plan. But at the end of that planning period, you know, more than 60% of the jets in the world still didn't have connectivity. So there was still a lot of market left to get.

Right. And I think that last comment you said is, like, particularly relevant, and that's why it answers my question, is because during the quarter, I think, you know, Viasat announced that win with FlexJet, and, you know, your stock went down by, like, 10% when, you know, it seems that, you know, Viasat's able to win, like, several aircraft in a quarter and Inmarsat and others can win, you know, aircraft, but that didn't, you know, impact you because the market seems to be, you know, very underpenetrated. And that's basically what I'm asking, if you think, you know, these other vendors are able to still win. Yeah.

Yeah, I mean, in Louis, in that case, those FlexJet planes were not in our addressable market because they fly to Europe. That was the whole reason they used Viasat. That's an edge case where Viasat has an advantage. Those had to go to Inmarsat or Viasat, basically. And so it was really not a loss on our part and, you know, it wasn't business we were competing for.

Great. Thanks, Barry.

Yeah, thanks, Louis. Okay. That was our last question. This concludes our call. Thank you for joining our second quarter call. Thank you, everybody.

Thanks, all. Appreciate it. Take care.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.