Gogo Inc.

Good day and thank you for standing by. Welcome to the GoGo Third Quarter 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'll 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, Vice President of Investor Relations. Please go ahead.

Thank you, Liz, and good morning, everyone. Welcome to GOGO's third quarter 2022 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. 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 2020. 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've filed with the SEC. In addition, please note that the date of this conference call is November 3rd, 2022. Any forward-looking statements that we make today are based on assumptions as of this date. 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 third 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. Good morning, everyone, and thanks for joining us today. In the third quarter, GOGO continued to demonstrate its ability to deliver record performance in a highly dynamic macroeconomic and supply chain constrained environment. Strong demand for in-flight connectivity combined with GOGO's innovative advanced platform and strong operational execution enabled us to deliver a very strong quarter. We believe all those factors will remain intact for the foreseeable future. and position us to generate growing recurring revenues and robust cash flow for the next several years. A key to our success is our advanced platform, which allows us to deliver equipment form factors designed to serve every size business aircraft, all running in the same software and all capable of being easily upgraded to our future 5G and global broadband products. As a result, we're bullish on our ability to retain our current customers and to capture a large portion of the roughly 30,000 business aircraft around the world that today fly without broadband connectivity. Today, I'll focus my remarks on first, our strong third quarter results and updated guidance. Second, the BA connectivity tailwinds helping to drive our growth. And third, our progress on GOGO's key strategic initiatives, our 5G ATG network and our global broadband or GBB project. So let's start with our Q3 performance. We delivered record third quarter revenue of over 105 million, up nearly 21% over prior year, fueled by outstanding service and equipment revenue growth. We're very proud of our production operations and supply chain teams for meeting the surge in demand we've seen this year. We shipped a record 388 advanced units in Q3 and now expect to ship more than 1,300 total advanced units this year. well ahead of our initial guidance of 1100 and up more than 47% from the 887 we shift in 2021. And we see this strong demand continuing. Our backlog is very close to an all time high and we've already received orders for almost 40% of our projected units for next year. The boost in 2022 shipments is allowing us to raise our full year 2022 revenue guidance range from 390 to 400 million up to 395 to 405 million. In the bottom line, GOGO delivered record third quarter adjusted EBITDA of 43.7 million, up 7% year over year, driven predominantly by growth in service and equipment revenue. Given the strong performance of our business, we're raising our 2022 adjusted EBITDA guidance from the high end of a 150 to $160 million range to a range of 165 to 170 million. This new 2022 guidance does reflect some puts and takes, including a $5 million reduction in 5G OPEX as a result of the delay in our 5G chipset, the majority of which will shift to 2023, offset for the full year by $6 million in a combination of legal fees related to the SmartSky litigation and GBB spending that were not in our original 2022 guidance. Now let me turn to some of the business aviation tailwinds driving our growth. Demand for BA connectivity remains very strong. Long-term, that demand is driven by a number of factors that are secular and sustained. First, the digital transformation of how we all lead our social lives and do business. And the younger profile of today's BA passenger make connectivity table stakes for business aviation passengers. Today's passenger expects an in-flight connectivity experience that is equivalent to their home office or living room, and that is translating to higher data usage for GOGO. Data consumption per hour by GOGO customers continues to grow significantly. It was up 14% over prior year in Q3, which is consistent with the growth that we've seen for the past six quarters. Consistent usage increases are driving customers to upgrade to GOGO's higher rate plans at a ratio of about two upgrades for every downgrade, which drove ARPU to $3,376 per month, up $112, or 3.4%, from prior year. We also grew aircraft online, or AOL, significantly over prior year, up 10% to 6,777 aircraft, of which 3,079, or 45%, were on the advanced platform. up 36% from prior year. We're pleased with the growth of our advanced install base because advanced allows customers to easily upgrade to new bearers like our GoGo 5G and OneWeb's LEO networks at much lower cost than ripping out our equipment and replacing it with competitive equipment. Increased travel demand is another factor that continues to boost activity across the BA industry. Even in the face of macroeconomic pressure, GoGo flights were up 5% over prior year in Q3 and 30% over Q3 2019, with corporate flight departments showing the greatest growth. Across our distribution channels, we continue to see strong demand. We were at the NBAA convention two weeks ago where I talked with a number of our dealers, all of whom said they were as busy as they've ever been. Increased flight hours have driven a faster pace of maintenance events, which in turn gives them more opportunities to install more go-go systems on more aircraft. This has translated into a bump in 2023 orders versus where we were on 2022 orders at this point last year. However, a bigger change from last year is our confidence in our ability to meet that. From a supply chain perspective, we're in great shape. We've brought lead times down to three months. We've built a sizable buffer stock pool for drop-in orders. we've got a clear line of sight to meet almost all component demand for 2023. And in the very few cases where we see potential constraints, those constraints don't appear until late in the year, giving us plenty of time to remediate. On the OEM side, demand also remains strong. Last week, both Textron and Gulfstream reported solid third quarter results, strong order books, backlogs, and book-to-bill ratios. Further, at the MVAA show last month, Honeywell increased its annual 10-year business jet forecast to 8,500 new jet deliveries, up 15% from the 2021 forecast for 7,400 deliveries. And finally, the expanded cohort of BA passengers catalyzed by the pandemic appears to be sticky. New research this month shows that 94% of all flyers who started using private aviation since the pandemic plan to continue flying private aviation post-pandemic. But now, let me turn to our strategic initiatives, which are focused on continuously improving our products and services, creating easy upgrade paths for our customers, and expanding our addressable market. Before getting into the initiatives, I think it's worth pausing for a moment to reflect on how far we've come and how far we'll go over the next few years in improving connectivity to aircraft. Not long ago, We were delivering kilobytes per second over our legacy ATG network in narrowband satellite products. That's gone to multiple megabytes per second today with Advanced L5. That will grow to dozens of megabytes per second with GoGo 5G by the end of next year, and will grow to hundreds of megabits per second over the next couple years as we deliver an evolved GoGo global broadband standalone and in combination with ATG. So let me start with 5G. As I'm sure you're all aware, we received some disappointing news immediately before our Q2 earnings call. Our 5G supplier, Airspan, informed us that there was a flaw in Samsung's fabrication of our 5G chip that locked the chip in test mode. We have just received final commitments from Airspan and their chip supplier that Samsung will need to re-spin the entire chip. Airspan will now receive the chip in Q2 next year. We will test fly in Q3. and that should put us all in the track for commercial launch in Q4. That said, our 5G team has done a tremendous job delivering all non-5G chip-related milestones on time and on budget, including installation of 900 antennas on 150 towers across the country and completing all manufacturing capability and certification of the equipment that goes on the aircraft. All we're waiting for is a small 5G chip which will be a minor amendment to our existing certifications, and then we'll be off and running. In fact, we've already started selling, shipping, and installing that equipment, which includes the 5G antennas and the harnesses to install our 5G box. This equipment can be installed with our Advanced L5 box today and run on our 4G network, and then easily accommodate the box with the 5G chip in the pre-provisioned and installed harness at a later date. Our dealers are on board with this approach. So far, we've delivered eight chipsets to customers and have more than 60 in backlog. The market remains very excited about our 5G product, as it will deliver speeds roughly 5 to 10 times faster than GoGo's current ATG network, with peak speeds up to 30 times faster, enabling multiple streaming sessions and video conferencing applications to be opened at the same time on the same aircraft, and all at a lower cost than competing LEO or GEO satellite solutions. On the commercial side, we've been continuing to hear tremendous excitement about our 5G product from jet and fleet owners of all sizes. The energy around this launch at MVAA was palpable, and we believe the pre-provisioning momentum we've seen so far is indicative of that. GOGO is working closely with each of the BA OEMs on LineFit and with several authorized GOGO dealers to complete STCs that will cover most major makes and models of BA aircraft. Now let me turn to GBP, the latest extension of our growth pipeline. We're making great progress in delivering the first global broadband product to serve all the business aviation market. That includes all sizes of aircraft in all corners of the globe. We're partnered with OneWeb to utilize their global LEO network, which is already more than two-thirds launched. We'll be deploying an electronically steerable antenna, or ESA, in conjunction with our partner, Hughes. It is small enough for installation on the fuselage of the full range of business aircraft, from super light jets, large server props, all the way up to large ultra-range aircraft. GOGO Global Broadband will allow us to first pursue the 14,000 business aircraft outside North America, a huge increase to our total addressable market. Second, pursue large North American jets that fly global missions and today often use GOGO in the U.S. in geosatellite solutions outside the U.S. And third, drive enhanced stickiness in our core North American medium-sized and smaller aircraft segments by offering an easy upgrade path to a LEO product when they want the additional capacity that LEO can provide. A critical point is that our advanced multi-barrier capability will allow us to serve North American aircraft with LEO and ATG at the same time, significantly enhancing capacity and providing redundancy for those owners who want it. Critical to the success of GBB is the ease of our upgrade and installation. For customers that already have Avance, the upgrade to add LEO will be simple. They will install an ESA antenna on top of the plane and run two wires inside, one for data and one for power. And they'll then have LEO connectivity with all the added functionality of Avance. For customers new to GoGo, they can choose from an array of Avance form factors, including the economical SCS box. and then pair that device with the ESA antenna for a relatively low-cost solution. GBB will enable streaming directly from your favorite services, multiple simultaneous video conferencing sessions, VPN access, and all the other connectivity-enabled solutions you use today at the same service levels you expect in your office or living room today. We're excited about the opportunity this initiative will create for GoGo and our customers, both in the near and long term. Our investment in GBB today is setting us up for success in the next era of LEO satellite technology and expanding our reach while capitalizing on our expertise in tailored solutions that exceed the expectations of customers across all segments of the BA market. To wrap up, our key strategic initiatives, driving advanced penetration, launching GoGo 5G, and developing global broadband, are in service of our long-term strategy. deepening and expanding GoGo's hard-earned competitive advantages to support our long-term growth. I'm very proud of our nimble, creative, and energetic GoGo team for their accomplishments in the third quarter. We're innovating and delivering on major strategic projects to set GoGo up to exceed our customers' expectations and drive long-term value for shareholders. Thank you, team. With that, I'll turn the call over to Barry.

Thanks, Oak, and good morning, everyone. In my remarks today, I'll start by walking through GOGO's record third quarter financial performance. Then I'll touch on GOGO's capital allocation priorities. And finally, I'll finish up with some additional context around our guidance. For the third quarter, our record total revenue of $105.3 million grew 20.8% year over year. Our top line was driven by record service revenue of $75.3 million as ATG units online grew 10% year-over-year and 2% sequentially. As Oak mentioned, increasing penetration of Vance and leveraging its platform capabilities remains a centerpiece of our strategy, both in the North American market where we operate today and globally as we launch our GBB product in the future. The third quarter of Vance units online grew by 186 units, up 38% year-over-year, and 6% sequentially. As we grew our ATG units online, ATG ARPA grew 3.4% year over year to 3,376 as our customers continue to upgrade their plans, including to our high data rate plans, which have been very well received since their introduction in early 2021. The launch of GoGo 5G, followed by our GBB product, will further expand our ARPU growth opportunity over time. Now turning to equipment revenue, GOGO delivered a record $30.1 million in equipment revenue in the third quarter, a 43% increase year over year as we shipped a record 388 advanced units. This is an increase of 47% year over year and 25% compared to the previous quarterly record we just achieved in the second quarter of this year. Our excellent supply chain team and ability to leverage our strong balance sheet to acquire inventory is allowing Goro to capitalize on unprecedented demand for our products. We now expect to ship more than 1,300 total advanced units in 2022, representing at least a 47% increase compared to 2021. Our equipment shipment expectations for the year combined with our exceptionally strong backlog and 18-year average equipment life, materially de-risk our longer-term targets. The impact of our higher 2022 equipment shipments has allowed us to once again raise our 2022 revenue guidance, which I'll touch on later in my remarks. GoTo delivered service margins of 77% in the third quarter, a 3% decrease year-over-year, primarily due to the $2 million catch-up credit for Federal Universal Service Fund regulatory surcharges recorded in Q3 2021. Service margins decreased sequentially due to an expected increase in network costs associated with the deployment of the GoGo 5G network. The service margin is within our target range of 75% to 80% for ATG for both 2022 and in the long term. Equipment margins were 35.9%. This represents a 5% decrease year over year, which was planned as a part of our strategic initiative to drive advanced penetration. However, equipment margins actually increased 4% sequentially due to higher revenue and lower production costs as a percentage. This improvement was also driven by a higher mix of advanced sales, which carry higher margins than our legacy satellite product. PERCENTAGE OF ADVANCED SALES INCREASED FROM 83% TO 87% SEQUENTIALLY WITH OUR LEGACY SATELLITE PRODUCTS DECLINING BY A CORRESPONDING AMOUNT. MOVING NOW TO OPERATING EXPENSES, THIRD QUARTER COMBINED ENGINEERING DESIGN AND DEVELOPMENT SALES AND MARKETING AND G&A EXPENSES INCREASED 11% YEAR OVER YEAR TO $29.7 MILLION. THIS INCREASE REFLECTS LEGAL EXPENSES RELATED TO THE SMART SKY PATENT LITIGATION and development expenses for GBV, partially offset by a decrease in stock-based compensation expense. Non-cash stock-based compensation expense in the third quarter decreased year over year due to the catch-up expense incurred last year relating to vesting for employee retirements, which primarily impacted G&A. As a reminder, the executive employment agreements put in place as part of our succession planning will continue to contribute to increased levels of stock-based compensation expense in 2022 and 2023 as compared to 2021. We also began granting equity to all employees beginning in 2021. This has contributed meaningfully to our employee retention and also results in higher stock-based compensation expense. We've always viewed 2022 as an investment year due to the planned ramp in spending for GoGo 5G. Operating expenses were actually slightly lower this quarter than initially expected due to the reduction in 5G expenses related to the chip delay. However, that spending as well as 5G operating expenses previously expected to be incurred in the fourth quarter will now shift to 2023. In addition, we continue to invest in development for our GDB initiative in the quarter, and this will wrap up through 2024. Now I'll provide some additional detail on our GoGo 5G and GBD initiatives and their respective spending profiles. Before jumping into the details of our GoGo 5G spending, I want to be very clear that the delay in our 5G chipset availability only impacts the timing of when our 5G spending occurs. We do not expect it to have any negative impact on the overall 5G program cost, which remains on budget. In the third quarter, our $18.5 million of 5G spend was comprised of approximately $0.9 million in OPEX and $17.6 million in CAPEX. We expect 5G CAPEX of approximately $40 million in 2022, a reduction from our prior expectations due to the chipset delay. The financial impact of the chip delay falls into three primary buckets. First, a push out of 5G milestone payments CERTIFICATION AND TESTING COSTS FROM 2022 TO 2023. SECOND, LOWER BACK HAUL COSTS IN 2022 GIVEN THE DELAY IN SPENDING TO SUPPORT GOGO 5G. NOTE THAT OUR LOWER BACK HAUL COSTS IN 2022 REPRESENT ACTUAL SAVINGS THIS YEAR. AND THIRDLY, OUR 2023 REVENUE EXPECTATIONS WILL BE IMPACTED BY THE POSTPONED 5G COMMERCIAL LAUNCH THAT IS NOW EXPECTED IN THE FOURTH QUARTER OF 2023. The reduction in 5G spending is comprised of an approximately $9 million shift from 2022 to 2023, $4 million of which is operating expense and $5 million is CapEx, along with approximately $1 million in backhaul expense savings. These reductions are reflected in our revised 2022 adjusted EBITDA, CapEx, and free cash flow guidance. Now on to our GBV initiative. We are excited by the opportunity GBB will create for GoGo, as it is well-positioned to deliver a healthy return on investment, including attractive service margins. Importantly, it is also based on a variable cost paid by the drink business model, as prescribed in our partnership agreement with OneWeb. In the third quarter, GoGo recorded $1.8 million in GBB operating expenses related to the achievement of project milestones with Hughes, our intended development partner. We continue to expect external development costs for GBB to be less than $50 million over three years, with spend ramping from approximately $3 million in 2022 to $10 million in 2023, with the remaining approximately $35 million to be incurred in 2024. We also anticipate that approximately 85% of GBB external development costs will be in OPEX. This spending profile is reflected in our 2022 adjusted EBITDA and free cash flow guidance and in our combined 2022 and 2023 free cash flow guidance. Now moving on to profitability. GOGO's third quarter adjusted EBITDA increased 7% year-over-year to $43.7 million, primarily driven by our record equipment sales. This is the highest adjusted EBITDA performance in GOGO history. GOGO delivered net income from continuing operations of $20.2 million in the third quarter, up 2.5% year-over-year. I would note that the Q3 2022 net income is net of an $8 million income tax provision compared to a $100,000 income tax provision in Q3 2021. Our financial statements reflect non-cash income tax expense as we continue to generate positive pre-tax income. While we may have fluctuations in our effective tax rate, we believe that using the combined federal and state income tax rate, 25% at current rates, would be a reasonable assumption for modeling purposes. Net income before income taxes increased 42% year-over-year, reflecting the profit-generating capability of the go-to-go business model as we continue to execute on our strategy. Third quarter net income translates to 16 cents in basic earnings per share and 15 cents in diluted earnings per share. These figures reflect the final settlement of our 2022 convertible notes, which occurred in the second quarter of 2022. Based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period, but we may pay a modest amount by the end of our 2026 planning horizon. We continue to expect to see additional reversals of portions of our remaining valuation allowance against deferred tax assets over the next 12 to 18 months. In the third quarter, we generated $8.5 million in free cash flow, down 65% year-over-year, driven by the expected increase in capex for GOGO 5G. Now I'll turn to a brief discussion of our balance sheet. GOGO maintained its strong liquidity position as we ended the quarter with $152 million of cash on hand. and we have yet to draw on our $100 million revolver. Our cash balance decreased from $164 million as of June 30, 2022, reflecting the share repurchase executed in September. You'll recall that we repurchased 1.5 million shares of common stock owned by affiliates of BlackRock in a private transaction for $18.4 million at a price of $12.23 per share. As of the end of the third quarter, we had approximately $716 million in outstanding debt on our term loan B and a net debt leverage ratio of 3.4 times, below our target of less than four times, which we achieved in the second quarter of this year. Now I'll touch on our capital allocation strategy. Our capital allocation priorities are in service of our strategic goals. These priorities include launching GOGO 5G commercial service, maintaining a target leverage ratio of less than four times, which may include paying down debt, investing in strategic initiatives, including GBV, and finally, returning capital to shareholders. The comprehensive refinancing we completed in the second quarter of 2021, which includes our seven-year term loan B carrying a variable interest rate of LIBOR plus 3.75%, meaningfully limits our exposure to refinancing risk. We are also well hedged with interest rate caps offsetting a significant portion of our exposure to interest rate changes. Of note, the fair market value of our hedge contract has increased by $46 million before taxes since putting it in place in May of 2021 on the heels of our comprehensive refinancing. As outlined in our 10Q, the portion of our term loans subject to interest rate caps reduces beginning in mid-2023 which will increase our exposure to higher interest rates. To quantify that exposure, based on the October forward live curve and with the interest rate caps we have in place, our annual cash interest expense would increase by approximately $13 million, from $37 million in 2022 to $50 million in 2026. Given the current volatility of the financial markets, and particularly the rising interest rate environment, we believe it is prudent to take a somewhat more conservative approach during these uncertain times. As we mentioned last quarter, we are choosing to maintain higher levels of cash on hand given these external circumstances. Our higher cash reserves allow us to preserve maximum strategic and financial flexibility. We saw the benefit of having this flexibility in the third quarter. As previously mentioned, Google repurchased 1.5 million shares of common stock at a value of $12.23 per share. This share repurchase was indicative of our confidence in the long-term value creation opportunity we see ahead. Now let's turn to our updated financial outlook. As a reminder, our guidance does not reflect the impact of the Federal Communications Commission's secure and trusted communications networks reimbursement program as we await further information regarding whether Congress will appropriate additional funds for eligible expenditures under the program. We once again raised our top-line guidance for the year. GOGO now expects to deliver full-year 2022 revenue in the range of $395 to $405 million, versus prior guidance at the high end of the range of $390 to $400 million. This increase was primarily driven by our exceptionally strong equipment shipments, as we've described. We also raised our 2022 adjusted EBITDA outlook to the range of $165 to $170 million versus prior guidance at the high end of the range of $150 to $160 million. This increase reflects a $5 million reduction in operating expenses associated with delaying the commercial launch of GoGo 5G, but it also includes a combined $6 million in expenses related to smart sky litigation and global broadband which were not included in our original 2022 guidance. We are raising our 2022 free cash flow guidance to a range of $50 to $60 million versus prior guidance of $35 to $45 million due primarily to a $10 million reduction in 5G spending. Our 2022 free cash flow guidance includes capital expenditures of approximately $55 million of which $40 million is tied to GOGO 5G. This compares to prior CapEx guidance for approximately $65 million with $50 million tied to GOGO 5G. It also reflects an expected $3 million in external spend related to our GDP project. We expect that aggregate free cash flow for 2022 and 2023 combined will be roughly equivalent the range of 145 to 155 million dollars which were provided on our q2 earnings call in august free cash flow for 2023 will be impacted by among other things the gogo 5g delay and potentially by the fcc reimbursement program looking further into the future our 2024 free cash flow will reflect ramp spending for our gogo gbb project of approximately 35 million dollars in that year as i mentioned WE CONTINUE TO EXPECT TO GENERATE FREE CASH FLOW OF OVER $200 MILLION BEGINNING IN 2025 AS WE GET ON THE OTHER SIDE OF OUR INVESTMENTS IN GOGO 5G AND GBB WITH OUR LONG-TERM GROWTH RATE ELEVATED BY OUR GBB PRODUCT. OUR OTHER LONG-TERM TARGETS REMAIN UNCHANGED. WE REITERATE THAT WE EXPECT REVENUE TO GROW AT A COMPOUND ANNUAL GROWTH RATE OF APPROXIMATELY 17% FROM 2021 TO 2026. with GBV expected to contribute to revenue beginning in 2025. We also continue to expect annual adjusted EBITDA margin to approach 50% in 2026, up from the low 40s in 2022 and 2023. Strong operating leverage is a hallmark of GOGO's transport and business model since the sale of our CA business in 2020, and it's the driving assumption behind the growth in adjusted EBITDA margin over time. WE PLAN TO PROVIDE UPDATED 2023 AND LONG-TERM GUIDANCE ON OUR FOURTH QUARTER EARNINGS CALL, AS WE TYPICALLY DO. IN CONCLUSION, GOGO'S BUSINESS CONTINUES TO PERFORM EXTREMELY WELL. OUR RAISED OUTLOOK REFLECTS OUR STRONG MOMENTUM AS WE PREPARE FOR THE COMMERCIAL LAUNCH OF GOGO 5G AND PURSUE THE DEVELOPMENT OF OUR GLOBAL BROADBAND PRODUCT. I WOULD ALSO LIKE TO JOIN OAK IN THANKING OUR ENTIRE TEAM FOR THEIR CONTINUED COMMITMENT TO GOGO AND FOR PROVIDING UNPARALLELED SERVICE TO OUR It's because of you that we are in such a strong competitive position today. Operator, this concludes our prepared remarks. We're now ready for our first question.

As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone. Our first question comes from the line of Phil Cusick with JPMorgan. Your line is now open.

Hi, guys. Thank you. A couple, if I can.

First, I guess, Barry, I hear your comment about being more careful with liquidity, but how should we think about capital return from here and maybe discuss the BlackRock share repurchase during the quarter? And then second, Oak, maybe think about the strategic value of GoGo as a standalone business versus potential sale. You had a lot of interest a few years ago. The business is stabilized. The outlook is much better. How do you think about the value of the company in the market today versus what it could be worth in a sale?

Thank you. Let me take the first part of your question.

I guess two questions really regarding the capital returns from here. So I think we've laid out our priorities for capital returns and starting with making sure that Google 5G is fully funded, we're in the right place on that revenue ratio which we're in good shape on both of those thirdly is to make sure we have dry powder to execute on our strategic initiatives including global broadband and there could be some others you know and then we actively consider return of capital shareholder so we're still proceeding down that path with those criteria in mind we have as i mentioned the chief of course two of those we do believe that gogo has significant cash flow generated capability in the coming years and you would expect that to result in and return to capital over time. But again, we just want to be prudent for now as things unfold and as we see the macro environment unfolding over the coming six months or so, that will inform what we do. But then that's how we're looking at it. We recognize it's something that is of interest to shareholders, including our largest shareholders, you know, in Oak and GTCR, so it's something that we're mindful of. On the BlackRock question, yes, as some of you are aware, BlackRock acquired stock in GoGo exceeding the 4.9% maximum that is provided for in our NOL poison pill, as we call it. When we discovered that, we with them recognized that they needed to sell down. And as they needed to do that, it provided an opportunity for us to execute on a share repurchase. And we felt like it was an appropriate thing to do. It sent, we think, the right message to the market, which is we very much believe in the long-term outlook here. At a price of $1,223 at the time, we felt like that was a very good investment, and yet it was not such a large amount that it would dampen the objective that we have of maintaining it.

So, Phil, on your question about valuation, I think we are very focused on maximizing shareholder value. Our board and I believe that there's tremendous value unrealized value in our current stock price, if you will, and that there's tremendous runway for growth in this business when you look at the market, you know, about 30% penetrated today and we're developing products that will give us the ability to address the full global market. So we're very bullish on the future. You know, if somebody came along and offered us a price that we felt reflected what we think the opportunity is, I'm sure our board would consider that. but today we're not actively pursuing a sale. We're very focused on our strategic initiatives, delivering on 5G, delivering on GBB, and we think that those will drive a lot of shareholder value in the future.

Thanks, Gus.

Our next question comes from the line of Landon Park with Morgan Stanley. Your line is now open.

Thanks. Good morning, everyone. I was hoping you could comment on 2023. Are you still expecting the 15% unit shipment growth that you talked about last quarter?

Yeah, Landon, we still expect to be in that range. We have the news on the 5G chipset being pushed back to us delivering commercially in Q4 is relatively new news. And so, we'll be factoring that into our budgeting for next year. We also have the impact of the FCC grant program that removed the ZTE equipment, and that's not factored into our unit count projections yet either. So, we'll give firm guidance on that in our Q4 call, but we still expect to be in that rough range.

Okay. And just to follow up on the 5G, are you confident at this point that the 4Q commercial launch is sort of set, or is there remaining uncertainty? And I think you mentioned, is it 60 units in the backlog? Was that a 5G comment, or if it wasn't, is there a 5G backlog number that you can provide? And one final question, just on the – sorry, go ahead.

Yeah, on that point, those are orders for the 5G antennas, the harness for the box that houses the 5G chipset, AR card, and getting the plane fully ready to accept that little box when the 5G chip is done. So those are orders that are 5G orders. Daniel, go ahead with the rest of your question.

Sorry. Is that the full 5G backlog, or is there another number that we should be thinking about from a 5G standpoint? backlog perspective.

No, that, I mean, that'd be the backlog now. Yeah. But those are people that are putting this stuff in ahead of even having 5G done. I just want to make that clear.

Okay. And then just one last question. Sorry, go ahead. Okay, go ahead. On the, just on the competitive side, you know, Starlink has obviously come out with a premium product for their services. How are you thinking about the impact to your business today and the impact to what you would expect for GBB over time and just your competitive positioning against them?

Sure. I'll go back to the confidence question. What happened with the fabrication of this chip was highly unusual. And this is really a Samsung problem with their subcontractor around the test mode of the chip. So it's got a lot of attention at Samsung. It's got a lot of attention at GCT. It's got a lot of attention at Airspan and a lot of attention at GoGo. And I'd have to say we appreciate the additional transparency we've been able to get from all of those players here since this problem first arose. So given the high level of attention on this and tremendous focus, we're fairly confident that we're going to get this chip on time. you can never say that there can't possibly be a problem. There are milestones in every project and milestones are called that for a reason, which is you got to get past them successfully. Uh, so there are a couple of key milestones going forward, but you know, at this point I'd say we're, we're, we're very confident based on, you know, just how well the project's being managed and how well it's going on Starlink, you know, uh, I almost do a victory lap on this. We projected this in Q1 2021 on our earnings call then. We were asked about them and we said, look, we think that they will come into the market with something that goes after the high end of the BA market because they're very focused on commercial aviation, MilGov. They'll be designing a relatively large antenna that works in those markets and would work in the high end of the BA market. That's what they've done. They've set a real premium price and it looks to us like they're really going after competing with the geo-satellite providers that serve business aviation today. In terms of our strategy, we all along have been more focused on the customer than on Starlink. We really appreciate what LEO technology and LEO constellations can bring to the market. It's a very good strategy. type of satellite offering for BA because of the fact that you can make smaller antennas due to the proximity of the satellites to the Earth. So, you know, we went out and decided we were going to try and develop a product that could serve the entire BA market, all segments from light jets, turboprops all the way on up, and would be global. And so that's what we've done. And, you know, I think Our product is positioned very differently than Starlink's. We have a much smaller antenna than they have, which is why it fits on all those aircraft. We are at a much lower price point than they are. We have, as part of our model, we have a very high service component to what we do. If your aircraft's on the ground somewhere and your connectivity is not working and You know, the principal is going to show up in a couple hours and the pilot is going to get a spear through his chest. We get a guy there to fix it, you know, and that's the type of service that customers really appreciate. And we have a broader offering. So, you know, we have our dash product, our mixed products, you know, our entertainment products and the like. So, you know, we think we're well positioned. I think that, you know, there will be some customers in the market that will go for what I'll call the low service service. kind of self-service model that Starlink has. So I wouldn't be surprised if they had some success up in the larger jets. That said, there's 30,000 aircraft out there that don't have anything today, and we think our offering will appeal to an awful lot of them. So we think we should be able to grow significantly there. Finally, I'd say we also have ATG, which is an advantage in the North American market. the ability to combine APG with LEO satellite presents a lot of tantalizing opportunities. You can run receive on one and transmit on the other, for instance, and do other things that would actually really boost the capacity that you deliver. So we find that very exciting, and we feel good about where we're positioned.

Great. Thanks for that context, Doug. Thank you. Thanks, Landon. Thank you.

Our next question comes from the line of Scott Searle with Roth Capital Partners. Your line is now open.

Hey, good morning. Thanks for taking the questions. Hey, Oak, if I could dive in on the 5G front, it's nice to hear that you've got some confidence around the timeline now, the third and fourth quarter of next year. But I wanted to delve in. I think you talked a little bit about STCs and line fits on that front. I wonder if you could dive into that a little bit more in terms of development on that front. Kind of what you're also seeing from a competitive landscape standpoint in terms of the delays of 5G, is it having an impact on demand? And then I wanted to clarify, I thought there was a comment around some lower revenue related to 5G. If I recall correctly, I don't think there were big numbers built into 2023, and most of the, you know, the Avant units in general are able to support that upgrade path. So I just want to make sure I understand the comment in terms of what you're seeing out into 2023 at this point? Because it sounds like you've got pretty good demand. I'm not sure what the coverage is for that 15% growth in 23.

So I think we were talking about STCs. That was your first part of your question.

Yep, competitive landscape as it relates to, you know, any of the delays there. Is that causing additional problems? And then really kind of, you know, your prior expectations for 5G are, in 2023? I know Avance, again, is, right, it's future-proof, upgradable, you know, so is that really having any sort of a material impact in terms of how you guys review? And it's certainly the second half of 23.

Yeah, so I'll start with the STCs. I mean, we have our STC and, you know, PMA for 5G today. We will have to do a minor amendment when we get the new chip. Today, that box has a 4G chip in it, and we'll have to replace that chip with a 5G chip. That is an amendment that will be not an issue at all. You know, that's really no change at all. So it should not be an issue at the FAA. You know, we have dealers who have already done STCs and installed. You know, we're installed on Russell Wilson's aircraft, and that was done with an STC for that type of aircraft. So we have lots of STCs that are all sort of waiting for that final 5G chip amendment at the last moment. So I think, you know, we've probably got about 30 plus STCs, you know, either in works or very close to complete and are waiting for the 5G chip. So, yeah, moving into production with STCs is not going to be anywhere on the critical path in terms of commercial launch. We don't see any impact on sales today of the delay in terms of competitive inroads. The market's basically just the same as it was a quarter or two ago. What we see that's great is an order backlog next year, and our big dealers place their orders for the next year around this time of year. And what we've seen so far is a pretty nice growth in those orders, the size of those orders. So we're feeling very good about that. The OEM bookings come in a bit later, so we don't know exactly where that will end up. So we're reserving judgment there because there would have been some 5G orders in that. The risk is the planes that you miss that went in for maintenance, they go in for a major maintenance event and would have had 5G installed. They might already have L5, in which case we don't have a sale opportunity, or they might, you know, just put in L5 and wait. And, you know, L5s have lower price points than 5G product. On the OIM side, again, you know, you get cut in on line fit. You don't want to miss that. And, you know, potentially, you know, that date might impact, you know, when we get cut in at certain places. So, I'm not saying we are, but, you know, these are all things we're working with the OEMs and dealers on right now to assess the impact.

Perfect. Very helpful. Question around the impact of SIP on 2023 revenue. The way to think about this, there are really two factors to consider. One is how many current L5 customers upgrade to 5G as we launch, and then separately, what are new customers going to do? So we do expect to see equipment revenue in particular impacted by the delay, which we would have seen ramping during 2023. So that will impact the revenue. We have accommodated that in the combined guidance that we've given on cash flow for years 2022 and 2023. On balance, you know, we expect L5 to continue to be the most widely widespread and sold product by the OEM partners. And so we don't expect a drop-off in L5 sales in the near term due to 5G launch. And L5 will continue to be the best option for many customers. It delivers fast, reliable connectivity and the option to upgrade that we talked about and so on. But over time, we saw this certainly ramping, but even by the end of our planning horizon, we saw 5G on the order of 20% of units online. So it's a very attractive product, but the impact has been huge.

And lastly, if I could, just to follow up on the Rip and Replace program, I know a portion of it, about a third, has been approved by the FCC. I'm not sure what the – could you update us on the timeline of when you would expect to hear back on the additional allocation? And it seems, you know, this is more of an upside opportunity than anything else. I just want to clarify how that swings or impacts your op-ex or otherwise cap-ex in terms of if the FCC approves the additional $3 billion to go to the Reverend Flay's program.

Thanks. So I'll address the timing questions and all that, and I'll let Barry handle the hard part, which is the impact on the accounting next year. So to be clear, the FCC has approved us for the $337 million. The FCC's program is underfunded is the issue. They had projected $1.9 billion in total grants when the bill was first going through Congress. The applications that came in significantly exceeded that. They cut lots of them back because parts of them didn't qualify, but even after cutting them back, the $1.9 billion only reflected 39% of the total number of approved grants. they've been working with Congress. There were two bills in Congress that ended up being very similar, a Senate bill and a House bill. The House bill was approved by the House, Senate bills in committee, but there was broad bipartisan support for the bill. And, you know, there were letters written by, I think, 36 senators signed a letter, for instance, and it was an unlikely grouping. You know, Chuck Schumer and Ted Cruz signing the same letter. It's kind of unusual, right? So there's broad support for the bill, which is good. But, you know, that this Congress ends when the new Congress comes in on January 3rd. And, you know, if it's not passed by then, it would be a do-over. So we're very hopeful that it will be addressed then, by then. And I think it, you know, I think it probably will, but this is Congress. So it's very hard to predict, you know, exactly what will happen or what will divert their attention. So timing is hard to predict.

And on the financial impact, Scott, it will certainly be a net cash flow benefit to GOGO if the funds are allocated at those higher levels. As you know, the initiative to remove ZTE equipment was always in our long-term strategic plan, but it was under a much longer timetable with standing well beyond 26 planning horizon. So, those costs were originally captured as part of our ongoing maintenance capex spread across those years. And the purpose of the program, of course, is to accelerate that timing to remove Chinese equipment. So as that happens, we would be reimbursed for that. So it's too early to talk, you know, about the real cash flow impact of that. But in general terms, kind of the puts and takes are that we would probably have to make some investment up front in inventory and so on. And then we would get reimbursed for that later. So there could be some negative, but on balance, it's going to be a positive. We'll certainly provide that more detail down that guide. if and when that gets approved at the higher levels.

Great. Thanks so much. Nice quarter.

Our next question comes from the line of Louis DePalma with William Blair. Your line is now open.

Hey, Louis.

Hey, Oak, Barry, Jessica, and Will. Good morning. Good morning. For Oak, what is the timing for aircraft flying with the new NB-13 combo, the 4G, 5G antenna?

Well, there's one flying today with the NB-13 antenna in it. Russell Wilson's aircraft came down to the NBAA convention fully fitted with the 5G system, minus a 5G chip. And dealers are installing, there's six sets out there right now, which dealers are installing minus the small box that holds the 5G air card with the 5G chip on it.

Great. That's exactly what I was looking for. And my next question, where... should we expect the Avon's penetration to settle out? And are there a significant number of go-go classic customers that are satisfied with their existing performance such that they probably won't upgrade to the Avon system?

That's a great question. And the answer is there are Today, we're about 45% of our install bases advance, and 55% is still classic. You know, we see steady migration, but there are customers that are happy with what they've got with the classic product. When you're going to see an upgrade, there is when they go to sell that aircraft. And generally, people these days have to sell a better connectivity service to sell the aircraft, or the new owner will put in an improved system. So aircraft turn over every seven years, roughly. And so there's certainly some that could be on the classic product for quite a while.

Gotcha. And one final one. This could be for any of you. If you were a sell-side analyst such as myself or even a buy-side analyst, how many aircraft would you project for the industry at the end of 2024 would be live with a Leo broadband satellite product for the business aviation industry?

You know, that's a great question, Louie. It's not going to be hundreds. It's going to be probably under a hundred by then, but I think it would be ramping up rapidly the next year.

Yeah. And the reason I'm, In your comments, you were talking about how you see there being demand for the Starlink services. There probably will be. I was just wondering what your expectations are for that and potentially others that may come after Starlink and how that fits into your long-term plans.

I'm not sure you're quoting me exactly correctly. I think that their model might be appealing to some customers who are do-it-yourselfers. You can go on their website and you can reserve the system. You don't know when you're going to get it, and there's no SDCs yet. They say they're working on a bunch of SDCs. And then you're going to find an installer. It's not clear if they're going to have an installation manual. I mean, there's just so many things you don't know yet about what Starlink is doing that it's kind of hard to predict. I think that it's competing with a geo-satellite product that's very, very expensive at a price point that's right around the same as the geo. And it's going to provide a significantly better service than the geo. So, you know, I think that there are going to be people of, you know, plenty of money who are going to, you know, go for that and would install it. You know, the question is when, and, you know, it's very hard to get on these jets. The timing of doing something like that's a big antenna. I mean, it's a really big antenna, and it has, you know, some challenges. It's, you know, it has to have this... mounding plate that's uh quite high and he's going to require decompression and things like that there's a lot of complexities in what they've done um that that we're not running into based on our design but you know that all can be overcome uh but you know to me it means it's going to have to be installed in a major maintenance event and you know that happens every three years let's say with a big aircraft so You know, you don't get at them that often. And before anybody's going to order it, they're going to make, there's an STC for what they're doing, et cetera. So it's going to take some time. And it remains to be seen, you know, how the competitors will react, how will Inmarsat and Biasat react to what Starlink's doing. So that's all, you know, very hard to predict. I would say right now, you know, the geo-satellites, there are about 1,600 roughly aircraft in the world that have a geo-satellite product on them. and you know that's been available for a long time um so you know i'm not sure that that this is cutting so much new ground that there's a whole new segment out there that's all of a sudden going to want satellite it's probably going to replace geo i would think in most instances um you know it's a very different setup the geo satellite products all are up in the tail you know this is going to be mounted on the fuselage uh and it's a pretty large item going on so A lot to be seen there. Nothing's going to happen lightning fast. There's a great man over at Duncan Aviation who I quote often on this. He says, business aviation is where things go to slow down. And I think he's right about that.

Thanks, Oak. Very eloquent.

Thanks, Louie.

Our next question comes from the line of Rick Prentice with Raymond James. Your line is now open.

Thanks. Good morning, everyone. Jesse, looking forward to hearing more from you in the future in early 23. But, Barry, do we get you one more time?

Well, I'll still be here through the call, so we'll have to decide whether Jesse's a spokesman or I am. I'll be around through there.

Yeah, definitely. We'll get those Ks out there too, right? I want to follow up on some of the other questions. The 17% long-term revenue CAGR, what's the split between units sold driving product revenue versus ARPA increasing with the different service plans out there? And has that changed at all given the chip delays?

Yeah, I don't think the chip delay really affects that mix, Rick, as you look out there. To break it down a little bit, so we'd had 15% compound annual growth rate in our model prior to announcing GBB. That added the two points additional when we saw that with those sales beginning in 2025. The lion's share of the split is coming from increased units online. About 13% of that is from URL. The balance is from ARPU. So it really is driving more penetration in units online. As you know, that's really the opportunity of this market. overall being just 30% penetrating. And on the ARPU side, you know, we see it going up for a couple of reasons and then muted for one reason that we expect it to go up as people have higher data rate plans, which they're interested in to have the more living room-like experience. Secondly, as we add 5G and then GDD, that will drive ARPU on the high side. The muting inputs on that will be as we get down into the the general aviation market a bit more if you don't have as high ARPU, but frankly what matters ultimately is the revenue per megabyte, and those are still very attractive unit economics. So those are kind of the puts and takes.

I appreciate the color on the interest rate potential for mid-23, something like $13 million additional interest, $37 million goes to $15 million. I assume that's for a half-year impact, so obviously a full-year impact would be more than that. Is that factoring into Phil's question on the return on capital? Are you going to be watching? Is the calculus at some point, I think you mentioned it even, that maybe there is pay down or buy down debt that's a better accretive value to free cash flow and free cash flow per share? And how should we think about the timing as you look at that?

Yeah, just to clarify the point about the $13 million increase that's an annual cash interest expense. That is That is in 2026, so it goes from the $37 million today to $50 million based on the forward curve as of October. So that's really the impact of that longer-term on interest rates.

So just to make sure we're talking about the same thing here. That's an annual effect, not a happier effect.

That's correct. It's an annual effect in 2026.

Based on October rates. Go ahead. Sorry. Did that answer that part of the question? But then, you know, kind of the calculus as far as how you look at buying down debt or... Yeah, you know, we... That's the impact in 2026.

Correct. Yeah. This one makes it not in 2023. Okay.

And then the impact of, on all this, on kind of our thoughts about debt payback, you know, it does inform it. You know, if we were in a low interest rate environment, we would be having different conversations and we'd be thinking about it a little bit differently. So, you know, we... tend to be pretty conservative, as you know. There is more interest rate exposure. Again, we think it's pretty managed, but the interest rate caps, for example, step down from $650 million to $525 million is the next step down. So that happens in 24. So they do step down over time, and so there is that exposure. But we just want to keep some dry powder for this, as well as for other things that we might do opportunistically. to be able to have that flexibility for the share buyback in September, for example. So, yes, it does influence us, but over the long term, I think the cash generation capability of the business is such that it would swamp out those interest rate issues because of the debt and the need for cash.

Makes sense. Last one for me, you kind of alluded to it there. You talked about potential for other strategic initiatives, keep dry powder for global broadband. And there could be others. It was mentioned in some other places that there could be some other strategic initiatives. You probably can't tell us a lot of what those are, but conceptually high level, what would make sense philosophically to say might be interesting to bolt on to the, the go, go, go to market kind of offers.

Yeah.

I mean, you know, we, we,

We've always said that we're always looking for ways to improve the performance of our ATG network. We think that a large part of the market will stay on ATG for a long time. We have good economics there. And of course, we make improvements in terms of capacity and what we're delivering there that will prolong that life. So I'd say they're mostly in that arena. You know, we do look at other opportunities in terms of, you know, bolt-ons or other types of things. We don't have anything in mind right now, so I'm not going to get out on a limb on that one. But I think the main focus would be improving ATG.

Is there any need for more spectrum? Is that something that might be looked at as well?

Well, you know, spectrum is something I never talk about because, you know, it only leads to trouble. So I'll delicately dodge that question.

Or elegantly, yes. Yeah, yeah. All right. Thanks, everybody. Jeff, look forward to hearing you on the next call. All right.

Thanks, Rick.

That concludes today's question and answer session. I'd like to turn the call back to Will Davis for closing remarks.

Well, everybody, that concludes our third quarter earnings call. Thank you for your participation, and we look forward to speaking next quarter. Thank you. You may now disconnect.