Gogo Inc.

Good day, and thank you for standing by. Welcome to the GoGo, Inc. Market Update Call. At this time, all participants are in 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I'm now going to hand the conference over to your speaker today, Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Shannon, and good morning, everyone. Welcome to our conference call to discuss GOGO's increased long-term financial targets and to review our investor presentation that was released as an 8K earlier this morning. Joining me today from GOGO are Oakley Thorne, Chairman 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 or in our press release filed on Tuesday morning, September 28, 2001. 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 September 30th, 2021. Any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligations to update these statements as a result of more information of future events. During the call, we'll present both GAAP and non-GAAP financial measures. This call has been broadcast on the Internet and available in the Investor Relations website of the GoGo website at ir.gogoair.com. GoGo's new investor presentation is also available on the website. After management comments, we'll host a Q&A session with the financial community only. Oak, over to you.

Thanks, Will. Good morning and thank you for joining us. As those of you who follow GOGO are aware, our equipment sales this year have exceeded all expectations, leading us to raise our 2021 guidance on both of our last two quarterly earnings calls. This has given rise to questions about how the follow-on service revenue to those equipment sales will impact the long-term guidance we provided to the street on our Q4 2020 conference call. In order to facilitate our 2022 planning, we recently updated our long-term model to reflect this service revenue flow through. We've reviewed those projections with our board, and our board approved them last week. We think that given the significant improvement we project for future performance, we should share those projections with the financial community. Hence, our PRESS release on Tuesday and this conference call today. On this call, I'd like to share what is driving our projections and why we feel GOGO is a compelling value creation opportunity. A little more than a year ago, we announced the sale of our commercial aviation division to Intelsat for $400 million, which has allowed us to focus on being a pure play business aviation connectivity provider. As a result of our 30-year history of focusing on the unique needs of the BA market, 85% of all broadband-connected BA aircraft in North America use GOGO, giving us a leading position in a fast-growing market that is still only 30% penetrated. But we're not resting on our laurels. We're working hard to leverage and build upon our competitive advantages, including our proprietary ATG network, our unique and future-proof advanced platform, and the deeply embedded relationships we have with our OEM and dealer partners. Together, these advantages enable us to provide an unmatched value proposition to business aircraft manufacturers, dealers, and owners. Finally, we have a compelling financial profile. We sell equipment at a profit and then reap the benefit of extremely sticky cash generative service revenue, 95% of which is subscription-based. Service revenue in turn drives strong cash flow. Once past the once-in-a-decade network upgrade with 5G in 2022, we expect to return to very strong EBITDA to cash conversion, as our normal maintenance capex is very low, particularly when measured against telecommunications industry standards. We also have a very strong balance sheet. In April, we completed a comprehensive refinancing that significantly lowered our leverage multiple and interest payments, allowing us to focus our resources on driving value for customers and for shareholders. In fact, turning to slide four, on a standalone basis, our BA business has always had a record of strong financial performance, with a 22% revenue CAGR from the time we went public in 2013 through 2020. As you can see on the left, We've had consistent equipment unit growth and very strong growth of our advanced platform the last few years, even through the pandemic. And I note that 2021 growth in this chart only represents the first half of the year. We typically have much stronger unit sales in the second half. As I mentioned a moment ago, advanced shipments this year have exceeded all expectations and should run greater than 850 units. 30% above our original budget and more than 30% above prior year. And we expect strong growth to continue with 20 to 25% growth in units projected for next year. Equipment sales in turn drive service plans. As you can see in the light blue portion of the bars in the middle chart, service revenue growth has been very strong with the exception of a small blip in the 2020 COVID year. We expect to return to strong service revenue growth this year. We don't normally guide to service revenue, hence the red 2021 bar in the middle chart does not break that out. However, on the Q2 earnings call, we stated that we expected service revenue to grow 20% this year over 2020, which equates to approximately 15% growth over the pre-COVID 2019 year. So a return to strong growth. Service revenue in turn drives adjusted EBITDA on the right. Again, we had a blip in 2020. but we've resumed growth once again in 2021, which is represented here by the guidance we gave on our Q2 earnings call. We're not going to update 2021 guidance on this call. We'll address that on our Q3 call. My final point on this slide is that with the exception of network upgrades like 5G, which we have to go through every 10 years or so, our normal CapEx is quite low, and we drive very high free cash flow conversions off our adjusted EBITDA. Turning to slide five, we're in the midst of a significant increase in demand for business aviation and in-flight connectivity, as the COVID pandemic drove new flyers to private air travel, and those new flyers demanded the internet. We look at aircraft utilization as one precursor to future demand, and in GOGO's most recent quarter, we saw 13% growth in flight counts in the GOGO fleet compared to the same period in 2019. But more significantly, counts grew each month of the quarter and had grown to 26% above 2019 levels in July. These trends are expected to be sustained, and recent market data proves it. In a survey of private flyers, 69% said they expect to fly private aircraft more frequently post-kilded than they did before. 28% said they'd fly about the same amount, and only 3% said they would fly less after COVID. In a Jeffrey survey, 70% of industry participants said that current industry growth was driven by people who started flying during COVID. And Textron reported that 20% of their new business this year was from first-time flyers. As a result of increased demand, fractional and charter fleets are looking to add capacity. with NetJets recently placing $2.5 billion of orders for new aircraft and suspending retirements of older aircraft. As a result of demand for newer jets, OEMs like Gulfstream and Textron are reporting significant increases in their book-to-bill ratios as orders for new jets pile in. The convergence of these factors spells significant opportunity for GOGO. As we'll discuss more later, GOGO's deep relationships with all nine business aviation OEMs and longstanding relations with its charter and fractional fleet customers positions us well to capture our fair share of this growth in aircraft online. Next slide. Not surprisingly, the shift towards new flyers is also driving a shift towards much higher data consumption. As business travelers will increasingly rely on technology to support the remote work environment, require seamless video conferencing and VPN access. And leisure travelers expect living room quality streaming capabilities for internet browsing, entertainment, and access to video-intense social media. And that result is that passengers are using more in-flight data than ever. Across our entire fleet, customers consumed 52% more data in Q2 2021 than they did in Q2 2019. given predominantly by a 26% increase in megabytes consumed per flight hour and a 20% increase in flight hours per day. No other company is as well positioned to deliver this service quality and capacity to VA flyers better than GOGO. Our advanced L5 platform, coupled with our 4G ATG network, delivers the low latency that applications like video conferencing demand and that geo solutions cannot deliver. GoGo's upcoming 5G launch will take that quality one step further, enabling enhanced streaming and multi-device video conferencing from a single aircraft. Capitalizing on this trend, we launched four new unlimited and high gigabit streaming plans for advanced customers in Q2 and sold more than 50 of them in a matter of weeks, driving an increase of $193 of ARPU per month across our entire advanced fleet. As this demand for data continues, we expect significant APU upside as advanced customers take advantage of over-the-air software upgrades to purchase higher capacity data plans and ultimately migrate to GoGo 5G. Turning to slide seven, it might surprise you that the BA market is largely not connected. Less than a third of the United States BA market has IFC capabilities installed today. And as I've said, Bego is the supplier to 85% of those connected aircraft. We expect the number of connected BA aircraft to grow by approximately 50% by the end of 2025, substantially increasing our market opportunity. We expect to win our fair share of those aircraft by virtue of our strong relationships with OEMs for capture of new aircraft and with dealers for capture of aftermarket aircraft. We're line fit at all nine business aviation OMs and offerable as standard equipment or as an option on 27 of the 28 models of business aircraft that are in production today. In the aftermarket, where we're seeing tremendous demand right now, we have an unparalleled network of 120 dealers that sell and install our systems and have 93 FAA certifications for installation of GOGO equipment on 200 makes and models of aircraft. So turning to slide eight, besides distribution, why is GOGO uniquely positioned to capture this market opportunity? First of all, because we have the largest addressable market of any BA IFC provider. GOGO's equipment is smaller and lighter than our geo-satellite competitor's equipment. The only GOGO fits on all sizes of business aircraft. This is especially important in midsize and smaller aircraft where space is at a premium. And though we're limited to North America by virtue of our network, it's important to consider that 65% of all business aircraft are registered in North America and 87% of all business aviation flights are flown in North America. Second, we provide the best customer experience. Though our speeds are comparable to our geo-satellite competitors, our low latency is vastly superior. and has a real advantage over geos in delivering today's latency-sensitive applications like video conferencing and video-intensive web browsing. We also offer the greatest set of features, including in-flight entertainment, flight deck applications, engine monitoring, self-reporting diagnostics, and much more. We're also cheaper, both for equipment and service, and represent a very small cost, somewhere between 0.5% and 2% of the purchase price of a private jet. And we provide great service. We've been ranked number one by AIN Magazine, which is the industry standard, for support in the flight deck and the cabin electronics category for nine out of the last 11 years. And we were second the other two times. And third, because of our vertically integrated business model, which I'll discuss in more detail in the next few slides, but quickly, we own, operate, and sell our own proprietary equipment and networks. Unlike competitors, we typically partner for equipment or network or for sales and service. This gives us tremendous flexibility to adapt to changing market conditions and very profitable owner economics. And finally, we sell a true product platform like Tesla or Apple that future-proofs our customers' investment in IFC so that they can be confident that they will be able to add new technologies as they evolve at relatively low cost. And I'll talk about all that in a moment in more detail. So let me take a minute now to dive a bit deeper into our ATG network and our unique AVANCE platform. Think of our ATG network as your terrestrial network. You've got towers, back halls, data centers, et cetera. And think of AVANCE as your Apple device, an iPad, an iPhone, iWatch, and iOS, the operating system that ties all those devices together. Let me start then. with the network. We own four megahertz of spectrum in the 850 megahertz range that was auctioned by the FCC in 2006 for ATG use. And given the value of spectrum for terrestrial use today, it's very doubtful that the FCC will ever auction ATG spectrum again. The spectrum ownership guarantees that we will always have access to a clean channel. which is not true of a would-be ATG competitor that I'll talk about in a few minutes. Today, we operate 260 towers that broadcast cone-shaped beams into the sky, similar to a cellular phone system on the ground. Those beams communicate to antennas and associated equipment on our 6,000-plus ATG aircraft and are supported by fiber and microwave backhaul from all towers to our redundant data centers. When we launched 5G, We'll use 150 towers, many of which will coexist with our current 4G towers, giving us some economies of scale. And we'll use 5G beamforming so that each private aircraft will have its own private beam. Our current Avance L5 product on our 4G ATG network has mean and peak speeds three to four times faster than our 3G network. And our 5G network will have mean speeds 10 times faster than our 3G network and will hit maximum speeds approaching 100 megabits per second. Because aircraft are never more than a couple hundred miles from a tower, our ATG networks have much lower latency than geo satellites that are 22,000 miles above the earth. Hence my earlier point that our network is more conducive to work from anywhere applications like video conferencing. Because we own our own network, our maintenance and operating costs are fairly fixed, and incremental service revenue above our fixed costs drives substantial margins. A brief note on our network performance. When we first launched our ATG network, we served the commercial airlines as well as business aviation markets. Back in 2017, when the commercial airlines' usage peaked on our network, they seriously degraded performance for business aviation aircraft. But since that time, virtually all mainline aircraft have come off the network, and we currently run about one-third the amount of data over the network as we did then. Given that offload and improvements we've made in handling capacity, we believe we can triple the number of aircraft we have on the network without degrading service, even with expectations that data usage per aircraft will continue to grow. And finally, our proprietary technology is protected by 30 years of R&D and know-how in a robust portfolio of over 375 patents. Now let me turn to Avance. Again, let me use the Apple analogy. Like Apple, which delivers hardware in many form factors, iPads, iPhones, et cetera, So do we with advance. L5 for big planes, L3 for small planes, SES for planes that only need a router, and all that is supported in the cloud. And as in the case with Apple, they all run the same operating system, iOS. And in our case, they all run GOS, the GoGo operating system. Like iOS, GOS or G-O-S is the software-centric extensible platforms. We can add new apps or services over the air that will drive stickiness in ARPU. Our GoGoVision Entertainment product is a good example. It's embedded in GOSS. We can promote it to customers by offering them free access. They decide they want to buy it, we can activate the subscription, the flick of a simple software switch. And we keep adding new apps. Last year we added Dash. an app that allows fleet managers to monitor the connectivity performance across their entire fleet and proactively address issues before they impact the passengers. And soon we'll be adding Mix, which will allow operators to allocate different levels of capacity to different people on the plane. So perhaps the CEO gets lots of capacity and the flight attendant not so much. All these apps help drive stickiness in ARPU. Advance also allows us to deliver world-class customer service. It has self-service diagnostic capabilities that notify us of issues on the air so that we can address them, often before the passenger or operators know a problem exists. Great service helps drive stickiness. And like your cell phone, which has the ability to tie into many different channels depending where it is, Advance has multi-barrier capabilities. So it can tie into R3 networks, but also the new networks, including satellite networks. For instance, we could develop an ESA antenna that we would install on top of the plane as an add-on to Avance. It could support a LEO satellite network coming into the plane, and we could operate ATG and LEO in combination. For an Avance customer, adding an ESA antenna to an existing Avance install would entail very little change to the interior of the aircraft. thereby avoiding the time-consuming and expensive rip and replace that would be associated with installing a competitor product. The rest of the install would simply be an over-the-air software upgrade, just like a Tesla. Also like Apple, our hardware products are built on common componentry, enabling us to drive higher demand with our suppliers to drive lower unit costs and to simplify our manufacturing and testing footprint to deliver low cost and high quality. For all these reasons, expanding advanced penetration is a cornerstone of GOGO's strategy to drive long-term revenue and ARPU growth. Turning to slide 11. Today, we have one set of real competitors, the GEO satellite companies, Inmarsat and Viasat, and one potential ATG competitor, SmartSky. I'll go over advantages versus both, starting with the GEOs on the right. As I mentioned, we have a latency advantage over the geo providers that is manifesting itself with our superior performance in real-time video conferencing applications. We also have an addressable market advantage in that we fit on all sizes of aircraft, whereas because of their size and weight, geo installations are relegated to the heavy and super midsize segments of the market. Our disadvantage to geos is coverage. They are near global, and we are limited to North America. However, large aircraft often have both systems on board and use GEOs for international flights and use GOGO domestically to achieve lower latency and lower cost. From both an installation and ongoing monthly cost perspective, GEO is significantly more costly than GOGO. And that may be why even in the heavy jet segment, GOGO is installed on slightly more jets than Viasat and MRSAT combined. As for speed, today our Avant L5 product on our 4G network is roughly equivalent to GeoSpeeds. However, when we deliver 5G, we believe we will have a speed advantage as well. The other competitor people often ask about is SmartSky, an aging startup that has raised and spent significantly more than $300 million since 2014 trying to build a competitive ATG network. If they had launched in 2016, as originally announced, they may have had a compelling product, but now their solution is old technology. It's 4G, and if ever launched, it will be slower than our 5G offering. Given the fact that they have repeatedly missed launch dates, they have very little credibility in the market. They are going to need to complete and operate their network to demonstrate that they are real before any dealers will sell their product. Their technical and market challenges are compounded by significant financing challenges. In spite of raising hundreds of millions of dollars to date, they require significant additional capital to build out the network. If they build it, they'll then face the challenge of funding large operating losses for several years while trying to sell and install the several thousand aircraft they'll need to get to to break even. Turning to slide seven. While we're very well positioned in business aviation today, we're not complacent. Looking ahead, we see several highly attractive long-term growth opportunities for GOGO, which are noted at a high level on this slide, but not included in our baseline plan or factored into our long-term guidance. The first is expanding our addressable market with a global LEO satellite partnership, which would accelerate our growth in the latter half of this decade. As I mentioned earlier, With a relatively modest investment, GoGo could develop an ES antenna that would take advantage of our advanced multi-barrier capability. We could partner with a LEO provider and drive substantial revenue growth and a very positive return on investment. It's a win-win-win model. Customers have told us they want a single provider of domestic and international connectivity services. Our LEO partner would immediately access our large advanced install base. And our broad advanced certification base would give us a tremendous head start over any competitive offerings. From a market perspective, a LEO offering would solidify our position in the North American heavy jet market, give us an avenue to add capacity to smaller North American aircraft if needed, and add 14,000 rest of world aircraft to our total addressable market. Another area for growth is expanding into the general aviation markets. made up of approximately 200,000 recreational and personal aircraft. Though large portions of that market may not be addressable for some time, lowering our service floor to 3,000 feet and rolling out our smaller form factor of anthel-free product has enabled some success, as evidenced by our recent service announcement. And lastly, the gateway to the cockpit, also known as Connected Aircraft Services. We've pursued CIS solutions for some time, and ADVANCE is designed with APIs that allow us to access data that can be used for safety services, maintenance, and performance monitoring, among other applications. None of these are board-approved projects at this point, as they are all still in the planning stage, but they do represent meaningful upside to our baseline plans. Turning to slide 13. So how should you look at GOGO? After all, we're a pretty unique animal. We look at ourselves as a digital infrastructure provider because we share many of the same financial characteristics. Like some of the digital infrastructure sectors listed on slide 13, we have a very sticky customer base, high recurring subscription-based revenue, high cash conversion after our 2022 5G investment, and low ongoing CapEx. Of course, We understand there are reasons that the sectors listed on slide 13 might trade at higher multiples than GOGO. They offer higher EBITDA margins and larger revenue bases and greater liquidity, among other traits. But GOGO also has some significant advantages that they do not have, such as much greater revenue growth, access to an underpenetrated market, and numerous opportunities to accelerate growth with modest investments of capital. And our adjusted EBITDA margins should grow over time as we scale our business. So turning to slide 14, as you saw in our release the other day, we raised our long-term targets driven by powerful, positive market tailwinds as well as strong equipment sales. We now target revenue growth at a compound annual growth rate of approximately 15% from 2020 through 2025. versus prior guidance of at least 10%. Adjusted EBITDA margin going from 40% in 2021 to 45% in 2025 versus prior guidance of a range from 35% to 40%. And finally, free cash flow of approximately $125 million in 2023 following the deployment of the GoGo 5G network in 2022 and approximately $200 million in 2025 versus prior guidance of more than $100 million in 2023 with significant free cash flow growth thereafter. As I mentioned at the top of the call today, GOGO and our board are aligned on these targets, and our increasingly positive outlook is driven by significant growth in GOGO equipment sales supported by strong industry tailwinds. Our financial model is a virtuous circle. Growing equipment sales draws high margin service revenue, which in turn provides cash flow that we can invest in enhancing our network, which in turn attracts more users and drives more equipment revenue. That cash flow also enables us to further deleverage to drive more cash flow, invest in new growth opportunities, and ultimately return capital to investors. We're excited about the future and GoGo's ability to deliver for our customers and shareholders as we execute on our strategy for long-term value creation. Now we'd like to turn the call over to Q&A. My colleague, Barry Rowan, our CFO, is also here today to answer your questions. Operator, please open the line, thanks.