Gogo Inc.

Good day, and thank you for standing by. Welcome to the second quarter 2022 GoGo, Inc. earnings conference call. At this time, all participants are in a 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 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Will Davis, Head of Investor Relations. Please go ahead.

Thank you, Crystal, and good morning, everyone. Welcome to GOGO's second quarter 2022 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO, Barry Rowan, Executive Vice President and CFO. Also listening in on the call is Jesse Betchman, Senior Vice President of Finance and Chief Accounting Officer. Jesse will assume the role of GOGO's CFO in early 2023. 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. Those risk factors are described in our earnings release filed this morning and are more fully detailed under the risk factors in our annual report on Form 10-K and 10-Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is August 5th, 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 will present both GAAP and non-GAAP financial measures. We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our second quarter earnings release. This call 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.

Thanks, Will, and thank you all for joining us this morning to discuss GOGO's record-breaking second quarter results. Since our last call, the macro trends around inflation and interest rates have created a major challenge Major challenging economic environment for many companies. But companies with clear competitive advantages and recurring revenue streams that drive robust cash flow are well positioned to deliver for shareholders even in these turbulent times. And after the transition we've gone through the last two years, GoGo is now one of those kinds of companies. As I'll discuss in detail today, the fundamental trends driving business aviation connectivity are still intact. resulting in continued strong demand for GOGO's equipment and service. GOGO also benefits from a business model that mutes the impact of inflation, which Barry will discuss in a few minutes. We're the leader in BAIFC today, and the innovative products we bring to market, like our advanced platform and our 5G network, truly differentiate GOGO and de-risk our strong cash flows for years to come. and we're putting a strong balance sheet to work toward additional innovation such as our recently announced Low Earth Orbit Satellite Global Broadband product or GBB that will give advanced customers an easy upgrade path to even more enhanced capacity and expand our addressable market outside of North America. Combine these capabilities with the fact that we're able to still generate strong cash flow even in network upgrade cycles like 5G and combine that with GOGO's huge market opportunity, 30,000 out of the roughly 40,000 business aircraft around the globe today still have no connectivity. And we feel GOGO represents a very attractive investment opportunity. I'll focus my remarks today on two main buckets. First, trends in the business aviation industry that drive demand for connectivity and drove GOGO's strong second quarter results. And second, our progress in two of GOGO's key strategic initiatives, the launch of our 5G network, and the Global Broadband Project. Barry will then walk through the details of our quarterly financial performance and update our 2022 and long-term outlook before we open the call up to your questions. So let's start with demand for connectivity in BA and GoGo's strong quarter. We delivered record revenue of nearly $98 million, up 19% year-over-year, fueled by strong service and equipment revenue. Our results demonstrate the demand for BA travel and connectivity remains very strong. GOGO's backlog, made up of dealer purchase orders and OEM commitments, reached record levels in Q2 and now covers our full year 2022 revenue projections and stretches well into 2023. This is one quarter ahead of our usual pattern of next year orders starting to flow in Q3 and Q4. An early look at 2023, including new sales and upgrades from classics to advance, suggests that we'll grow shipments by more than 15% over the 1,300 we've raised guidance to this year. As a result, we expect 2023 revenue growth to be above the 15% CAGR in our long-term model that we guided to earlier this year. Also, importantly, These increased equipment shipments translate into recurring revenue, which sets us up well to accelerate free cash flow growth from 2023 and beyond. This long-term demand is driven by a number of factors. The younger profile of today's BA passenger has resulted in reliable and robust in-flight connectivity becoming table stakes. Passengers demand the ability to work, video conference, email, and connect on social media in the sky, the same way they do in their home office. That demand was once again reflected in our Q2 results as data usage by GoGo customers across our networks was up 33% over prior year, and usage per flight hour up 11%. We also saw about twice as many customers upgrading plans as downgrading plans, contributing to our ARPU growth. Additionally, BA flight counts, but general bellwether for BA demand, remain at all-time highs. Charter and fractional jet flight counts soared during the pandemic, but in the last several months, we've finally seen corporate jets, which represent about 60% of GoGo's fleet, come back to life, with flight counts up 27% for the quarter and data usage up a whopping 81% over pre-pandemic Q2 2019 levels. To that point, the demand for travel is having ripple effects across the BA industry. used aircraft for sale are at an almost all-time low at 2.6% of the U.S. fleet, and many operators are now buying jets overseas to bolster supply, which is good for GOGO because they often require in-flight connectivity installation. And order books at the OEMs remain strong. Four out of five publicly traded OEMs reported Q1 book-to-bill ratios of greater than two times or better, meaning that for every jet they delivered, they had two on order. Since 2009, only one OEM had previously ever reported a book-to-bill ratio above 2, and that was in 2021, which was already part of the recovery. All of this activity is driving broader GOGO adoption. We shipped a record 310 units in Q2 and finished the quarter with 6,654 ATG units online, a 10% increase over Q2 2021. We've booked and secured supply to ship 1,300 units this year, roughly 45% more than last year, and we expect Vance to account for almost 50% of our install base by year end. The good news is that with our strong supply chain management, strong balance sheet, and common componentry strategy, we've secured the supply we need to deliver on our fiscal year 2022 expectations, and we're confident in our ability to secure supply to meet our 2023 projections. As a result of our continued progress and strong performance, we now expect to deliver full year 2022 revenue at the high end of the $390 million to $400 million guidance range that we raised last quarter. As we look ahead, we believe we can continue to grow our top line for the following reasons. First, roughly 16,000 business aircraft in North America have no connectivity today and are addressable with our current ATG network and best-in-class advanced platform technology. And second, there are roughly 13,000 business aircraft outside the U.S. that don't even have access to connectivity today, and that will be addressable with our global broadband initiative. On the earnings front, despite 2022 being an investment year, we continue to deliver growth, with Q2 adjusted EBITDA up 12% year-over-year to $41.2 million. and we expect to finish the year at the high end of our 150 million to 160 million guidance range. As Barry will discuss, we're maintaining that expectation despite $9 million in fiscal year 2022 expenses that were not included in our original fiscal year 22 guidance, namely our global broadband initiative, which was an overlay at that point, and legal fees in connection with our Smart Sky litigation and increased interest rates. As we look forward to 2023, our business is firing in all cylinders and we're excited about GBB and our strong order book. Now let me turn to our strategic initiatives. GoGo's strategy is focused on deepening our competitive moat and driving long-term shareholder value by creating easy upgrade paths for our customers as technology, digital infrastructure, and customer preferences evolve. That starts with enhancing our ATG network. and the launch of GoGo 5G, which will improve average performance 5x to 10x over GoGo's current ATG networks, with peaks of three times those numbers. On the commercial side, we're extremely encouraged by the response from our market. We're taking orders for 5G from end customers, making progress towards getting line fit with major OEMs, and pre-provisioning some aircraft now with our 5G antennas and harnesses so operators can install the 5G box quickly once the network is available. It's great to see this level of traction with a product that isn't even on the market yet and demonstrates how much the VA market trusts GOGO to deliver. We've passed many significant milestones, including FAA certification of our 5G box, was combined with prior approvals for our Avantel 5 box and our multiband 5G antennas means we now have received all required approvals for our 5G airborne hardware. As of this morning, we've completed construction of 95 towers, nearly two thirds of the 150 towers needed for us to offer complete nationwide coverage. And we have clear line of sight to the equipment and resources required to finish the remaining 55 sites. One recent unfortunate development the manufacturer of our 5G chip has just notified us of a new issue in late stage testing which could delay ramping up to full production volume until mid 2023. This wrinkle has been factored into the 15% unit growth projection I shared a moment ago. We believe the impact of this delay will be muted because customers that want 5G can pre-provision and buy our L5 and MB13 5G antennas today and operate on our 4G network while they wait for the 5G box next year. This shift will also delay some 5G expenses from 2022 to 2023, which Barry will cover in a moment. Our second key strategic initiative is driving advanced penetration and leveraging the platform capabilities of advanced to strengthen our competitive position, provide an easy upgrade path for customers and allow us to serve new markets. Six years ago, when we designed AVANCE, we designed it with multi-barrier capability, anticipating that evolving satellite technology would support GOGO's expansion to the rest of the world market over the long term. Our global broadband initiative is the realization of this long anticipated next chapter for IFC and for GOGO. As we announced in May, We've partnered with Hughes Network Systems to develop a small, electronically steered antenna, ESA, to access the one-web, low-Earth orbit, LEO, satellite constellation, and expect to deliver the first reliable LEO global broadband service to the global business aviation market. GOGO's exclusive antenna assembly will be small enough to fit on virtually all sizes of business aircraft, from superlight jets and large turboprops to ultra-long-range heavy jets. We're also very excited about partnering with OneWeb. They've launched 428 out of 648 satellites and are ahead of other LEO constellations in achieving global coverage, which we expect will enable us to be first to market with a reliable product. Their Gen 1 network will deliver a significant boost in speed over our 5G product and is fully funded. And with their proposed merger with Eutelsat, they should be in a good position to fund their Gen 2 network which will deliver an even bigger boost in speed, thereby giving GOGO Advanced customers a very easy path to an order of magnitude improvement over the speeds BA passengers experience today. Once launched, GOGO Global Broadband, or GBB as we call it, will allow us to first pursue the 14,000 business aircraft outside North America, a huge increase in our TAMP, Pursue large North American jets that fly global missions that today use GOGO ATG in the U.S., but geo-satellite connectivity outside the U.S. Drive enhanced stickiness in our North American customer base by offering an easy upgrade to GBB and a unique dual ATG and LEO solution that combines the capacity of both networks. For customers that already have Avance, the upgrade to GBB will be simple. They'll just install an ESA antenna on top of the plane and run two cables inside, one for data and one for power. GBB is projected to significantly accelerate our revenue and free cash flow growth from its launch to the second half of the decade. And Barry will give more details on the financials and long-term targets in his remarks. Finally, what's most exciting about GBB is the overwhelmingly positive response it's received from customers, dealers, and OEMs. It's really encouraging to see this level of interest and further proof that our strategy is working. To wrap up, I want to thank my GoGo teammates. We've completed an extraordinary turnaround in the last two years. We're working hard, we're innovating, we're beating expectations, and delivering a major strategic project that set GoGo up to exceed our customers' expectations and drive long-term value for shareholders. With that, I'll turn it over to Barry.