Gogo Inc.

Ladies and gentlemen, and welcome to the Q4 2021 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Mr. Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Jerome, and good morning, everyone. Welcome to GOGO's fourth quarter 2021 earnings conference call. Joining me today to talk about our results are Oakley Thorne, 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 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 release filed this morning and 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 March 3rd, 2022. 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 fourth quarter earnings release. This call is being broadcast on the Internet and available on the Investor Relations 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.

Thank you, Will, and thanks for joining us this morning. As we highlighted in our press release, GoGo's 2021 fourth quarter marked an outstanding end to a transformative year for our company. Our first full year as a pure play business aviation connectivity leader. I'm incredibly proud of all that our team has accomplished and how well positioned we are to create substantial value in the future. Let me start with a little highlight reel of key 21 achievements that reflect the relentless focus and determination of our world-class go-go team. Together, we met an intense surge in demand for BA connectivity equipment and data. In the midst of a global supply chain crisis, we scaled advanced shipments by 40% and we successfully introduced business aviation's first unlimited data and streaming plan. We hit historic financial inflection points, turning in positive quarterly net income and earnings per share for the first time in Q3 and positive free cash flow for the full year 2021. We completed a comprehensive refinancing that reduced our annualized interest expense by more than $70 million, giving us the financial strength to invest in improving our products and services, to further deliver our balance sheet, to secure components in a supply-constrained world, and to return capital to shareholders when appropriate. We entered the exciting 200,000 aircraft strong general aviation market with our Cirrus partnership, offering GOGO IFC on the G2 Plus vision jet. We gained traction in the under-penetrated light jet and turboprop markets, as evidenced by our recent announcement that the Pilatus fractional operator Planesense is installing our Advanced L3s on their entire fleet of 46 PC-12s and PC-24s. We executed extremely well in our GOGO 5G project, including most recently completing a testbed that sets Gogo up for an on-time, on-budget commercial launch in the second half of 2022. We also signed up JetEdge and Duncan Aviation to 5G commitments that will help secure a successful commercial launch. We continued our strategic initiative to drive penetration of our future-proof advanced platform with a 46% increase in install base in 2021. in advance now representing 39% of our ATG installed base, up from 30% at the end of 2020. We also achieved a 96% equipment retention rate for the year, which raised our rolling average equipment lifetime on an aircraft from 17 years to 18 years. Each quarter, we exceeded and then raised 2021 guidance, including exceeding Q4 expectations with the performance we announced today. This is evidence of the very strong demand for IFC in the business aviation market and our superior performance in meeting that demand. As a reminder, we provided initial 2021 revenue and adjusted EBITDA guidance ranges of 300 to 320 million and 105 to 120 million respectively, significantly below the numbers we delivered today. We also introduced long-term financial targets on our year-end 2020 call. And we've raised those targets again today, reflecting our bullish outlook on business aviation demand for in-flight connectivity and confidence in our continued ability to meet that demand. We've truly come into our own as a new go-go, and our financial performance this year bears that out. We ended fiscal 2021 with record total revenue driven by record advanced shipments and record service revenue. We ended the year with 6,400 aircraft online, just short of 11% higher than at the end of 2020. We hit $3,300 in ARPU for Q4, up almost 8% from Q4 2020. And we grew full-year adjusted EBITDA 54% year-over-year. I focused my remarks this morning on the factors that drove our strong fourth quarter performance and that we believe will continue to drive our growth in the future. I'll share progress on our key strategic initiatives, and I'll introduce our 2022 financial guidance and updated long-term targets before turning it over to Barry. Then we'll open up the call for questions. It's evident from our fourth quarter that demand for BA travel and connectivity remains very strong. We believe the two primary tailwinds driving that demand are the growth in high net worth individuals over the last decade and the significant increase in data consumption driven by growing usage of video-intense social and work-related applications, partly driven by the COVID pandemic. We also believe those tailwinds are sustainable, setting us up for long-term continued success as we execute on our strategy of enhancing our ATG network and driving market penetration of our advanced platform. Growth in the number of high net worth individuals over the past decade, has driven significant growth in the cohort of people who can afford to fly privately, either on their own jets or through fractional shares or charters. And not only has that cohort grown, but it's also grown younger, with 67% of the respondents in a recent GoGo brand study now from generations X, Y, and Z, and only 32% from my old baby boomer generation. COVID drove that cohort to try private aviation as an alternative to commercial airlines. And now that they've tried it, they're not going back. OEM sales of new jets and fleet sales of fractional ownerships are up dramatically, largely driven by new private flyers, indicating that those new flyers are making long-term financial commitments to private aviation. The second tailwind, the dramatic increase in data consumption, is also driven partly by COVID. The pandemic fundamentally changed the way that people of all ages think about connectivity as the work from anywhere and the socialize from anywhere cultures became the norm and drove demand for highly interactive data-intense applications like Zoom, FaceTime, or Office 365. These two trends drove a 78% increase in the data consumed by business aircraft on our network in Q4 2021 versus pre-pandemic Q4 2019. The biggest variables driving that increase were a 38% increase in megabytes consumed per flight and a 29% increase in flights per day. The shift in data consumption drove two and a half times as many customers to request plant upgrades as requested downgrades in 2021, versus a roughly even split between upgrades and downgrades in 2019. We expect this growth in data consumption to continue driving ARPU as video-heavy content becomes more pervasive and ultimately as the metaverse and connected aircraft applications enter the aircraft cockpit and cabin. Fortunately, GOGO will have the capacity to meet this demand. Since offloading mainline commercial airline fleet several years ago, we have freed up a lot of capacity in our network and project that we could accommodate roughly triple the number of aircraft we have on our network today. We also expect the number of aircraft on our network to continue to grow, and that will drive the number of service plans we sell. We finished Q4 with 6,400 aircraft online, up 10.8% year over year, and we expect continued strong growth this year. In Q4, we booked record new equipment orders, and our equipment order backlog already accounts for 90% of the 2022 equipment revenue in our guidance today. In fact, we see that trend continuing for the long term. Today, only 30% of the 24,000 business aircraft in North America have broadband in-flight connectivity. We expect that number to grow to 50% by the end of 2025, and a leading business aviation trade association projects that number to grow to almost 100% by 2035. Our bullishness on the business aviation market is buoyed by what we see in our OEM and dealer distribution channels. OEMs such as Textron, Bombardier, and Gulfstream are reporting the highest order flow in 15 years. And since our advanced platform is installed on roughly 60% of the aircraft coming off the line destined for North American delivery, that is a very positive trend for GOGO. We're seeing even more demand in the dealer channel and are currently predicting a 50% increase in units shipped to dealers this year. and projecting that dealers will represent more than 65% of our new shipments in 2022. Taken together, data, flight, and aircraft demand drove outstanding Q4 top-line growth for GOGO, with record revenue of $92.3 million, up 19% year-over-year. We hit record service revenue of $69.3 million and very strong equipment revenue of $23 million. Our continued growth demonstrates the virtuous cycle of our business model in action. Equipment sales profitably expand our base of subscribers, generating recurring, sticky, high-margin service revenue, which drives cash flow to invest in improving our network and platform, which in turn attracts new customers, providing more equipment shipments, generating more recurring, sticky, high-margin service revenue, et cetera. Finally, let me touch on our bottom line GOGA's ability to translate the powerful demand tailwinds I just described into bottom-line value is a testament to the exceptional unit economics of our business. Even excluding our huge Q4 income tax benefit, we delivered positive net income and positive EPS for the second quarter in a row, both of which marked a nice contrast to the losses we ran in Q4 2020. We also more than doubled our quarterly adjusted EBITDA over Q4 2020, and we drove more than $50 million in free cash flow for the last half of the year. We're proud of our results and the momentum we're building, and I'm proud of the GOGO team, which continues to rise to the challenge of meeting exceptional demand and executing on our strategic initiatives in a supply-constrained world. Now, let me turn to our strategic initiatives for a moment. GOGO has two major strategic initiatives. aimed at deepening our competitive moat and driving long-term shareholder value. First, enhancing our ATG network to keep pace with customers' on-ground connectivity expectations. And second, driving penetration of our flexible, future-proof advanced platform. I'll start with enhancing our ATG network. The first step in the successful execution of that objective is the commercial launch of our GoGo 5G network in the second half this year. 5G data speeds and low latency will be a top differentiator for GoGo, as business customers increasingly require seamless video conferencing and VPN access, and leisure travelers expect living room quality streaming capabilities for accessing video-intense social media. We previously announced and continue to expect GoGo 5G to deliver 25 megabits per second on average, with peak speeds in the 75 to 80 megabits per second range. a significant improvement over the already competitive speeds Avance delivers today, and leapfrogging both geo-satellite competitors and a potential ATG competitor. As a reminder, our potential ATG competitor is still working toward a 4G network launch that they say will deliver speeds roughly equivalent to what we already deliver with Avance L5, and significantly slower than what we will deliver with GoGo 5G. Even if all goes according to the potential competitor's plan, their eventual 4G solution will not be able to compete with GoGo 5G on speed, not to mention many other product and service deficiencies that make a successful launch of their product highly improbable. As I'm sure most of you know, this potential competitor filed a lawsuit against us on Monday, alleging that our 5G implementation infringes on four of their patents. This from a company that has invested hundreds of millions of dollars over the past eight years and is now six years late on delivering a functioning nationwide network. Our patent attorneys and engineers have studied the entire SmartSky patent portfolio and we know these four patents very well. I can assure you we do not infringe on those patents and we will fight this lawsuit with extreme vigor. Now let me move to 5G advantages over geo-satellite competitors. They're limited to the super mid and heavy jet segments of the market because of the size and weight of their gimbal antennas, and their equipment is more expensive and more difficult to install than ATG. But more importantly, we think 5G will outperform GEO on speeds and on latency. Based on user customer surveys we've conducted, GEO satellites provide speeds of 2 to 17 megabits per second, depending on the provider, a bit slower than our 5G will offer. But more important, due to the 44,000-mile round trip that packets have to travel to reach the Internet and then come back to the aircraft, they suffer very high latency, making interactive video difficult. While our APG network is limited to the continental United States and Canada, geos have the advantage of near global coverage. However, 87% of all global BA flight hours are in North America, and 77% are within the United States. which gives us a very large addressable market. In terms of 5G milestones, we've now passed all technical hurdles and are into the deployment and commercial launch phase of the 5G program. We reached a major deployment milestone at the end of last year when we completed a seven-tower testbed on time and on budget. The testbed includes sites in both remote and populated locations in order to validate that the network is operating as designed. We'll complete the other 143 towers at a rapid pace throughout the first half of 2022. Last week, we announced that the GOGO 5G aircraft antenna has received STC and Parks Manufacturer Approval, or PMA, from the FAA. Receipt of PMA is an important milestone as it essentially means that the FAA has green-lighted the mass production of our 5G radio antennas ahead of our 5G deployment. On the commercial side, we've already signed JetEdge as GoGo's 5G launch customer. JetEdge has advanced L5 installed across most of its large cabin fleet today and will upgrade 50 of those aircraft to GoGo 5G, which gives us a really strong head start on delivering our 5G projections. Additionally, Duncan Aviation, the largest independent MRO in the world, is upgrading all of its existing full equipment advanced L5 STCs to include GOGO 5G, which will cover more than 30 aircraft models, including aircraft manufactured by Bombardier, Gulfstream, Dassault, and Textron. As Barry will touch on in a moment, 2022 is a big investment year as we deploy the 5G network, ramp up our sales and marketing, and fund inventory to support installation demand. It's worth noting that we expect to fund the entire 5G network out of internally generated cash flow. In fact, just one year of interest savings from our recent refinancing more than covers our entire 5G CapEx costs. Now let me move to our other major strategic initiative, Advance Penetration. Advance is a platform, not a product, that runs across multiple form factors and computing platforms, and affords us tremendous opportunities to drive profitable growth by improving stickiness, introducing adjacent products, and penetrating adjacent markets. AVANCE affords us many opportunities for growth, but for purposes of this conversation, one of the more important features of AVANCE is its multi-barrier capabilities, which allows us to add multiple networks to the aircraft in order to deliver more data capacity for passengers and crew. For instance, We could partner with a global LEO provider and add capacity from their LEO network to Avance's existing ATG capacity to deliver even more data to the aircraft. We could do that by simply developing an ESA antenna that sits on the fuselage of the plane and plugging that into the Avance platform inside the plane. That would be it from a hardware installation perspective. The rest of the install would be accomplished with an over-the-air software upgrade. To make the math clear, let's say that in five years, we improve ATG to deliver 50 megabits per second. And in that same timeframe, LEO networks are deployed that can deliver 100 megabits per second. If we added the LEO network to the existing advanced ATG installation, that configuration would deliver 150 megabits per second, much greater than either the ATG or LEO network could deliver on their own. The global broadband initiative would allow us to, first, pursue the 14,000 business aircraft outside North America. Next, pursue geo-satellite installations on large North American jets that fly global missions. And third, defend and drive stickiness in our core North American market of medium-sized and smaller aircraft by offering LEO capacity if they need more capacity than what ATG alone can offer. We think that we have some natural advantages over potential LEO competitors in pursuing the Global LEO Broadband Initiative. First, our advanced installed base is several times larger than our competitors' installed bases. It would be far cheaper for those aircraft to upgrade with GOGO and leverage the advanced system that they already have in place than to rip out advanced and install new systems for all the functionality that advanced already provides. our deep and mutually profitable distribution channel relationships with OEMs and dealers. We're already line fit in all business aircraft, and we have our 120 dealer network already outfitted to install Avants. And adding an ESA to their installations would be relatively simple compared to cutting in a whole new product. And third, speed the market. We can simply amend the OEM type certificates and aftermarket supplemental type certificates that already exist for Avants to add the ESA antenna. just like we're doing now for 5G, giving us a speed to market advantage over competitors who will be starting from scratch. In short, we see tremendous upside of the LEO strategy via Advance. If we proceed, we expect to accelerate our growth in the latter half of this decade, and we expect our investment would be modest compared to our 5G investment, and it would be spread over several years. Another way Advance gives us opportunity to grow is the ability to remix common componentry into new form factors while using the same advanced software to address the specific needs of adjacent markets. Our entry into the general aviation market is a good example. We accomplished this by developing the small form factor of NSL-3 and by lowering our service floor to 3,000 feet with a software upgrade, not an equipment upgrade. And with those changes, We've gained traction both in the smaller fuselage segments of the business aviation market and in the 200,000-strong general aviation market, two markets where our competitors' equipment is too large to compete. And the beauty of it is that with the same software and using common Avance componentry, we can continue to develop new form factors that will further help us penetrate those markets. So to summarize, Avance gives us a lot of opportunities to improve equipment stickiness introducing adjacent products, and growing into adjacent markets. And for those reasons, growing the AVANCE install base is core to our strategy. So far, we've been quite successful at that. AVANCE is the most successful broadband product ever launched in business aviation, with just over 2,500 aircraft online at year end 2021, up 46% over prior year. And it's installed on more aircraft than our two biggest competitors combined. We reported 105 net advance installs in the month of December alone and 267 for the quarter. We project at least 25% growth in advance unit shipments this year. As I already mentioned, we've already booked 90% of those orders. We also see demand drivers that lead us to believe we can exceed our 25% unit growth target and are intensely focused on our supply chain to see if we can make that happen. I'll touch briefly on our financial guidance before turning the call over to Barry, beginning with a few caveats. First, our 22 guidance does not include potential strategic investments like the LEO Global Broadband product I discussed a moment ago. Assuming we green light those initiatives, we'll roll those into our projections and update guidance as appropriate. We've long characterized 2022 as an investment year, focused on finishing our 5G deployment and supporting its launch with all the resources necessary to succeed. That said, we expect to still grow adjusted EBITDA and still have positive free cash flow, despite those investments. We're also extending and raising our long-term financial targets, given by the strong equipment sales we're seeing today and the usage trends I highlighted earlier in the call. both of which will drive sticky, high-margin recurring service revenue for many years to come. In turn, those new financial targets are the springboard for our capital allocation strategy, which Barry will walk you through in a minute. We have our 5G investment well in hand, and we've zeroed in on our target leverage ratio. And as soon as we complete sizing our strategic growth opportunities, we can vector in on our approach to returning capital to shareholders. So let me conclude by saying we believe GoGo presents a unique and compelling opportunity. We serve an under-penetrated market that should provide opportunity for years of profitable growth. We differentiate ourselves based on our deep understanding of that market and our ability to create unique services and products tailored to the specific needs of that market. And on top of that, we see numerous opportunities to deploy modest amounts of capital into adjacent products and into adjacent markets to accelerate profitable growth in the latter half of the decade. We're excited about the future and GoGo's ability to deliver for our customers, employees, and shareholders as we execute on that strategy for long-term value creation. And now I'll turn it over to Barry.