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spk00: 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.
spk09: 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.
spk05: 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.
spk00: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Scott Searle with Roth Capital. Your line is open.
spk01: Good morning. Thanks for taking the questions. Thanks for hosting the call. A lot of details that you've got in there, Oak. So maybe to dive in on a couple of follow-ups, it looks like from your financial guidance and how you're talking about the market through 2025, it looks like the market is still maybe about 40%, 45% penetration, and you still have pretty high market share, I think implied in that, about 80% plus. As part of that, I'm wondering if you could take us through some of the thoughts in terms of penetration of different markets. For example... Attach rates on new OEMs versus retrofit. Where does turboprop fit in there? And then when you look at those and you combine kind of turboprop versus the higher-end bonds, like how should we be thinking about ARPUs as we go along over the next couple of years? And then I had one quick follow-up.
spk05: Barry, do you want to take that?
spk08: Yeah, let me start with ARPU, and then we can talk about the penetration levels. So, Scott, we do see ARPU continuing to increase as we go forward. As we talked about when we described the at least 10% growth rate, about 8% growth in aircraft, 3% growth in ARPU. The growth in ARPU is driven by a couple of things. It's driven by people increasing their plans as they want more data, as Oak described earlier. It's also projected to increase as we roll out the 5G product, and we'll be able to charge more for that because of the enhanced service. On the other hand, there is some downward pressure on ARPU as we get into the lower end of the market or really the broader market for the light jet turboprop market. But importantly, the service margin is comparable for those smaller planes, and the profitability per megabyte is also comparable. So it's still very good business, but as you'd expect, They're shorter flights and so lower revenue per unit. If you look at the penetration levels, the penetration levels for the smaller end of the market turboprop are much, much lower than the heavy iron aircraft, as you'd expect. So they're in the kind of single digit range for the light turboprop market. When you get up into the higher end of the market, they're in the north of 50% kind of penetration levels. So as we see this playing out, there will be an opportunity to drive penetration across all of those segments. But because of the real white space in the light jet total market, we see that opportunity there. And even though it is not in our original plan, to get into the general aviation market still does, as Oak mentioned, represent an upside opportunity, and we had some success with this important Cirrus contract that we've announced. So that's how we see it kind of unfolding. Great.
spk05: Thank you.
spk08: Very helpful.
spk05: Oh, sorry, go ahead. Yeah, let me just add on the sort of market share question. You know, we really don't focus on market share. We focus on unit growth because that drives the bottom line. However, in our planning, we have assumed – that all of our competitors continue to grow and that Smart Sky launches. We're not sure they will, but we assume that they do for our planning purposes. At the end of 2025, because that's the end of the current planning period for us, the market is still, yeah, is less than 50% penetrated, between 45% and 50% penetrated. So still a lot of light space even at the end of 2025.
spk08: Great. And if I could just to quickly follow up. I realize I didn't address your question about the OEM and retrofit market. So what we're seeing is that historically, connectivity was not installed on all OEM products. If you go back a few years, which is one of the reasons the market is not as penetrated as you might expect it to be with connectivity, going forward, the number of installations of connectivity for planes coming offline is much, much higher. So with the high book-to-bill ratios and with the OEMs accelerating their production levels with more of those planes having connectivity when they roll off the line, that's also going to drive the connectivity going forward.
spk01: Great. Thanks. And if I could, just on the 5G front, I just want to confirm that you're on track in terms of the second half of next year. And, Oak, you know, talking about some of the further upside opportunities, it sounds like it's still embryonic and early, but I'm wondering if you could give us a relative sizing when you start to think about a strategic GEO or LEO relationship, the general aviation market. What does that do to the overall TAM as you look out towards the end of the decade? Thanks. We appreciate you hosting the call.
spk05: Yeah. So 5G is in good shape. We recently passed a critical milestone where our 5G chip, provider actually confirmed formally that they would deliver on schedule, which keeps our project on track for second half delivery next year. So we're feeling really good about that, very confident about delivery. In terms of the TAM, what a LEO partnership would do for us is really give us access to the rest of world market. And there are 14,000 business jets and turboprops in the rest of the world that are addressable. And that's from large jets all the way down to turboprops. So it's a significant expansion of TAM. And we already have distribution and service relationships around the world because we currently sell narrowband satellite connectivity products globally. We have about a thousand some odd customers outside the United States. So we've got a footprint we can lever to actually go sell. And, you know, I think it could be a very exciting opportunity for us.
spk01: Thank you.
spk00: Thank you. Our next question comes from Simon Flannery with Morgan Stanley. Your line is open.
spk10: Thank you. This is Landon on for Simon, actually. Just a couple questions. Could you, just following up on the prior question, could you just disaggregate the 15% between ARPU and unit growth and then Separately, maybe you could talk about how you guys are thinking about equipment margin over time as you look to get that legacy base upgraded to the Avance platform. And then finally, could you just clarify what was behind the timing of this update to guidance? We thought that you had previously planned to update it towards the beginning of next year, so just curious what drove the timing of the announcement.
spk05: So I'll start with that one, and then I'll let Barry talked about the other two questions. Yeah, we did an interim revision of our long-term model because for demand planning, we have to figure out with long lead times now, we have to figure out what we think our demand is going to be out 18 months. So our board had asked us to upgrade our long-term model. There was also a lot of questions from the street. about, look, you've got this great equipment sales. What's the service flow through going to look like over the long term? So we're in the middle of our planning process and the beginning of our budgeting process right now and felt that it was important to actually project the flow through of the equipment sales into service, understand demand, et cetera. So we redid the model for the board. We presented it to them last week. Given the the significant improvement in projected performance of the board, and we felt that we should share it with the street also because it would be, frankly, material, nonpublic information, and having that sit around for months didn't seem like a very wise thing to do. So we thought it would be better just to be public.
spk08: Thank you. I landed on your question about the drivers of the revenue, the 15%. guidance that we've provided. About two-thirds of that comes from increasing aircraft online, and the balance of that comes from increasing ARPU and some things that are outside of ARPU, like the Intelsat revenues, for example. But two-thirds of it comes from increasing units online. And then you had a question about equipment revenue and how those margins we expect to trend over time, correct? Correct. Yeah, so the real – driver of the value of GoGo, of course, is service revenue and that recurring revenue stream and 95% is subscription-based. So clearly equipment revenue leads to service revenue. So one of the things that we are willing to do, that we make good money on and good margins on selling equipment revenues, we're willing to take some margin on the equipment revenue. So as we look at that trending over time, we do see the equipment margins coming down a bit from where they had been. Historically, they had been in the high 30s and 40s. We do see them coming down a little bit as we are willing to drive advanced penetration because really the key strategic thrust here is to get as many advanced units in the market as possible because it really future-proofs our business and really is a benefit to customers. So we see those margins coming down over time as we introduce 5G, and also as we see a little higher mix of the L3 products versus the L5 products getting into the parts of the market that use that less expensive equipment.
spk10: Great. Thanks. And just one final question. Just on the geo side of the equation, what percent of your unit base and what percent of your revenue base would you say is addressable by that competitive set?
spk05: of the geosatellite providers?
spk10: Yeah, basically what part of your base is those large jets and how much of your revenue is attributable?
spk05: I'm going a little bit, speaking from the hip a bit, but 20%, 25%, somewhere in that range. That market, the heavies, there are really, I'd say, three missions. There are those that fly overseas all the time, most of which have been grounded due to COVID for a while here. But they have a, you know, prominent need for geosatellite coverage. And some of them would, you know, have our ATG as well for when they're flying over the U.S. because they flip to ATG to save money and because of the low latency. Then there's a middle group which, you know, might fly around the U.S. most of the time but are, you know, do go overseas. and maybe they're not traveling. They're going to Mexico or South America or whatever. They might not have geo at all. And then there's a large group, about 40% of that market, that just flies inside the United States, and they predominantly have a need for ATG and not for geo. That's kind of the breakdown. We actually have, I think we count that segment about between 3,500 and and 4,000 aircraft, and we have a little more than 50% of that market.
spk10: Great. Thanks very much.
spk00: Thank you. Our next question comes from Louie DePalma with William Blair. Your line is open.
spk03: Barry and Will, good morning.
spk05: Good morning.
spk03: I'm for Barry... For Barry, with the cash flow visibility, can you discuss the potential for a stock buyback in 2023?
spk08: Sure. With this increased guidance, it certainly accelerates our ability to do the kinds of things that we have talked about. We discussed the prioritization of our capital allocation, I think, on the last call. We certainly are interested in in driving shareholder value, and that can mean return to cash to shareholders over time. But the way we think about it is we want to get 5G deployed. We do want to continue to drive reduced leverage. Thirdly is we want to continue to invest in the business. And as Oak laid out, we see some significant opportunities for investment that don't take a tremendous amount of capital but can drive meaningful top-line growth like the global – broadband product getting down into general aviation and so on. And then the fourth priority is a return of capital to shareholders. So we haven't decided on what that timing might be, but certainly with the expectations for increased cash flow based on the acceleration of the top line that really has the very high flow through to free cash flow that could pull those opportunities up somewhat. But that We'll evaluate it as we get on the other side of 5G. I don't want to speak totally for Oak, but I can tell you that return of capitalist shareholders is something that he is interested in.
spk03: That's awesome. Thanks, Oak, Barry, and Will. That's it for me.
spk00: Thank you. Our next question comes from Linda Tanza with Cowan. Your line is open.
spk04: Thanks, guys. I appreciate the call and Obviously, you've got some really strong tailwinds here, but let me play devil's advocate for a minute. Two questions. First, why exactly is your licensed spectrum a differentiator? I understand the ability to fall back to a dedicated channel and why that's important, but why can't a would-be competitor contract for spectrum with Verizon, contract for spectrum with Verizon, AT&T, someone like that? And then secondly, on the competitive front, In the past, you've talked about Leo, Mio, as well as GEO as a potential threat, but on slide 11, you do not today. So I'm wondering, has there been a change in your thinking there? Why shouldn't investors be worried about Elon Musk with Starlink or OneWeb or guys like Telesat that are building Leo, Mio constellations? Thanks.
spk05: Sure. Let me jump on the last part first and then the The last part, we've never seen them as a threat. Investors did. We kept getting asked about it, so we responded to that. Telesat and OneWeb are both clearly focused on B2B models. If you look at the deals that they've announced, they're not going to go directly into markets, especially markets as small as ours themselves. They're going to sell capacity to other people. That's what their business is. As far as Starlink goes, We recently did a study of this. When you really look at the numbers, it would be almost ridiculous for them to come into our market. They're going after the $200 billion consumer fixed market. They're going after the $80 billion defense market, middle-gov market. You can walk down in terms of markets they're going after that you measure in tens of billions of dollars. When you look at our industry today, the entire service revenue in our business industry is $500 million probably. And the study we did projects that it will reach $900 million by the end of 2025. That's not a market that they will bother spending a lot of time investing in. And the market itself is very complicated. It's a very fragmented market, so you need to go at it. in a lot of different ways. You've got to go through dealers. You've got to go through OEMs. You've got to appeal to the end user market. You've got to have special relationships with the big fractional providers, et cetera. And there's a lot of regulatory complexity to our industry. It's very complicated. The engineering is very complicated. It's very hard to get connectivity to an aircraft at 40,000 feet, 400 miles an hour. So for such a small market, it would be remarkable for Starlink to want to commit a lot of resources to come in here. So I can see Starlink going after commercial airlines. That's a $9 billion market. And if they fit on large regional jets, maybe they will want to sell to some of the large aircraft at the very large end of the business aviation market. But that's a relatively small market. And frankly, the amount of service and amount of work to – to go after even that segment of the market is probably not worth their time. So in the answer to Leo, of the three constellations that are most likely to be up today, two are clearly focused on B2B models, and so would be publicly more in the partner vein. And from Starlink perspective, it would be hard to imagine them wanting to focus on a market as small as ours. So that's the first part of your question. Your other question, I'm sorry, could you repeat it?
spk04: Sure. It was the spectrum as a differentiator, your own spectrum. And I understand that having a fallback channel, a dedicated channel, is important. But I'm just wondering why can't the next would-be competitor just simply lease spectrum from someone like Verizon or AT&T or Sprint or someone like that and recreate it without having to get a new auction or the FCC involved?
spk05: Because they're not allowed to use it for air-to-ground. That spectrum is terrestrial. So it can go up. a couple hundred feet, but it's not supposed to be used for air to ground. It's not legal.
spk04: Okay, thanks for taking the questions.
spk00: Thank you. Our next question comes from Phil Cusick with JP Morgan. Your line is open.
spk06: Hey, guys, a couple of quick ones. First, Oak, you said that virtually every mainline aircraft has come off the network. Can you expand on that, and what does that mean for the revenue stream you're getting from Intelsat?
spk05: Yeah, we still have regional jets on the network. We support all the regional jets that went to Intelsat as part of the CA sale, but I think it's probably 100 or less mainline aircraft that are left. Mostly those were older models that airlines didn't want to upgrade to 2KU because they were going to retire them pretty soon. Right now, it would be a very, very small number of mainline jets left on the network. At the regionals, it's about 1,000 jets, but of course they have a much lower usage footprint than the mainlines did.
spk06: Any indication on what that revenue stream looks like over the next few years?
spk08: Yeah, we have a contract with Intelsat that runs over 10 years. It's $178 million over that 10-year period. It ramps during the course of that 10-year period, so the expectation for this year is in the kind of middle to high single digits, and then it grows up from there, middle to high single-digit millions.
spk06: Okay. Okay. And then just a quick follow up on Landon's question about timing. You know, this was a good overview, but was there any strategic reason that this needed to happen now as opposed to after earnings?
spk05: No.
spk08: Easy. Thanks, guys. Appreciate it. Well, the other piece I would just add that I described before, Phil, was that we did update the model and and and We did it sooner than we had planned. On our last earnings call, we said we planned as a man of normal course to update that ahead of our Q4 call. But because of the equipment strength and all the benefits that we're seeing in the business, it was materially affecting our outlook. And we provided the updated guidance for 2022 on our last earnings call, at least top-line guidance. And so we then did a – formal refresh of that model more recently, and as Oak said, it was just approved by the board last week. So once we saw that our expectations had increased, we wanted to get that information out promptly. Good. Thanks, Barry.
spk00: Thank you. Last question is from Rick Prentice with Raymond James. Your line is open.
spk07: Thanks for putting me in, guys. Echo, thanks for doing this. Although we are surprised it was happening now, this is a course. I appreciate the answers. A couple of ones left for me. Oak, you had mentioned VSAs. Can you talk to us a little bit about how you see antenna technology, where we're at and how it's playing out over the next few years?
spk05: Yeah, Rick, you were a little garbled, but I think you were asking about how we see ESA antenna technology developing over the next couple of years?
spk07: Yes.
spk05: Yeah. Yeah, I mean, ESAs exist, obviously, in the military, and they've been around. They're just very expensive and very hot. There are a couple dozen companies that are trying to develop ESA technologies serve various markets there are some that are focused on aero i'd say you know more generally probably in a large commercial aircraft and in the business aviation market you know we have dialogues going with many of those companies and as you probably are aware rick we actually had an investment in one of them at one point and we you know we pride ourselves and our ability design equipment that fits the unique needs of the business aviation market. It's that deep knowledge of how you engineer to fit on these small aircraft that is a unique competitive advantage of ours. We're working on who our partner ought to be to help us develop an ESA that we could take into our market. We think that's a couple-year project once it launches. And that should coincide relatively well with when we think some of the first LEO networks will become available.
spk07: Makes sense. And you've hinted a couple of times, but can you talk a little bit about how you see maybe industry structure or M&A or anything else you guys might want on your wish list?
spk05: You know, I think we've got a great industry structure, so... You know, we've got a highly fragmented market where we have deep relationships. You know, there are, in terms of the suppliers, you know, to our industry, there's nine OEMs instead of two that can kind of control everything in the commercial aviation business. And then, you know, because of IATG network and the unique nature that, you know, we have a highly differentiated product. So we like that. I don't think that we see... any M&A as necessary for us to succeed in our mission. That's not to say we wouldn't look at opportunities down the road, but right now we don't have anything on our want list.
spk07: Okay, and the last one for me, we get this question with decent frequency from investors. Why be a public company? Should you be a private company? Should you be part of something bigger? Do you want to get bigger? But just kind of as you think of your size, how do you guys view kind of the public versus private maybe side of that equation?
spk05: Yeah, well, we're hoping, I mean, part of today's effort, as you know, Rick, over the last couple years we've talked about, you know, when do we relaunch GoGo to the public markets to try and communicate information the value of this business to the public markets. And, you know, today as part of that effort, I think that, you know, we've been, you know, fortunate in terms of the increase in demand in business aviation. It gives us, you know, a great opportunity to talk to the market about, you know, the value we see in the company. And frankly, you know, we hope that the public markets see that and we're going to do our best to communicate it effectively. Great.
spk07: Appreciate you guys doing this today. Thanks, guys.
spk05: Yeah.
spk07: Thanks, Rebecca.
spk00: Thank you. I would now like to turn the call back over to Will Davis for any closing remarks.
spk09: Okay. That concludes the conference call this morning. Thank you for your attendance, and we will talk to you soon. Thank you. Thanks, all.
spk00: This concludes today's conference call. Appreciate it. Thank you for participating. You may now disconnect.
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