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.