Gogo Inc.

Thank you for standing by and welcome to the Go-Go's fourth quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I would now turn the conference to your host, Mr. Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Valerie, and good morning, everyone. Welcome to GoGo's fourth 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, and Jesse Fetchman, who will assume the role of GoGo's CFO on March 11, 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 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 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 February 28, 2023. 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 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 Uncle Ian. Thanks, Will, and good morning, everyone.

Thanks for joining us. Our 2022 fourth quarter capped off a great year for GOGO. We exceeded our growth expectations and positioned ourselves for continued long-term growth and value creation. Our industry has seen seismic shifts in demand coming out of COVID. Thanks to our talented GOGO team and strong operating infrastructure, GOGO stood atop the avionics and electronics industry in its ability to scale and meet that demand. We expect those demand drivers to continue, and we'll continue investing in improving our products and services to meet that demand and maintain our leading position in the business aviation in-flight connectivity industry. As I mentioned, 2022 was a very busy year. Together, the GOGO team achieved a lot and released the 1.5 million flight milestone on our advanced platform since its launch in 2017, cementing its position as the most successful broadband product launch ever in business aviation. We completed the multi-year simplification of our capital structure and reduced our net leverage ratio to below our target of four times in connection with the conversion of our final outstanding notes. With net leverage of roughly 3.1 times at the year end and with ample cash on the balance sheet, we're well positioned to execute on strategic initiatives that will ensure a long-term competitiveness. We have definitely managed supply chain in a year of strong demand and weak supply. And many dealers tell us we were the only avionics company able to meet their demand last year. We shipped more than 1,300 total ATG units, an all-time record, up more than 50% from 2021, and more than 20% above our initial guidance, all of which we believe will drive a record increase in aircraft online in 2023. We completed the 150-tower bill for our 5G network, and we're on track for a fourth quarter launch. As I'll discuss later, our customers are excited and hungry to upgrade to this next level of service, and we're actively selling, shipping, and installing 5G equipment. We aim partnerships with OneWeb and Hughes to deliver the world's first low-earth orbit global broadband product size to fit on all VA aircraft. This initiative will take us from serving single-digit megabits per second today to delivering hundreds of megabits per second for the high-performance segment of the VA market over the next few years. We did that by aiming to build a much smaller antenna than competitive LEO and GEO satellite providers, as we aim to be the disruptor, not the disruptee, in the rapidly evolving satellite ISC space. And finally, not to be overlooked, we continued our strong track record of financial performance. We raised our fiscal 2022 financial guidance every quarter and ultimately delivered record performance at the high end or above those raised expectations. While we're happy with our progress, it's far more important to focus on our future and the 2023 financial guidance and long-term targets that Jesse will cover demonstrate our confidence in our business and in our value creation opportunity. So I'll focus the rest of my remarks on two areas. First is some key highlights and market drivers of GOGO's strong fourth quarter results. And second, an update on our strategic thinking and progress against our strategic initiatives. So let's start with our Q4 performance. We ended the year on a high note. We delivered record fourth quarter revenue of 108.2 million, nearly 17% over prior year, fueled by record service revenue and record equipment revenue. We added 158 new service revenue producing advanced units and ended the year with 47% of our fleet on advance. Adding additional advanced units online is central to our growth strategy. First, it drives incurring high-margin service revenue. Second, it extends customer lifetimes by offering upgrades to new technologies like 5G and GBB that are easier and cheaper to execute than moving to competitors' solutions. As I mentioned, we shipped a record 390 advanced units in the quarter, and we anticipate those will help drive record activations in 2023. On the bottom line, GOGO delivered record fourth-quarter adjusted EBITDA of $46.2 million, up 17% year-over-year, driven predominantly by growth in service and equipment revenue. We're really pleased that we can deliver this kind of bottom-line performance, even as we invest in strategic initiatives like 5G and GBV. We believe the strong demand we're seeing is the result of a structural change in BA passenger demand. Evidence by GOGO flight counts being up 31% for the quarter when compared to pre-COVID Q4 2019. That change is driven by a number of factors, including a large cohort of flyers that tried private aviation during COVID and plan to keep flying private aviation, a shift in passenger demographics to gens X, Y, and Z who demand connectivity when traveling, and a digital transformation in how all passengers live their lives, whether that's their social lives or work lives, in ways that drive demand for more high-bandwidth applications. The impact of that digital transformation is evident in go-go data consumption. Consumption per passenger hour grew 17% year-over-year in the fourth quarter and was up 50% from 2019 for the full year. One recent trend of note is the return of corporate flight department activity. The Part 91 owners, which represent 59% of GoGo aircraft online, signed 23% more flights in 2022 than in pre-COVID 2019, and using 46% more data per hour than they did in 2019. As a result of all this activity, we saw a significant demand pull across our distribution channels. And both our dealer and OEM partners have told us they could have installed more aircraft with GoGo if it were not for shortages in labor, and or parts from their other suppliers. We saw a big surge in shipments in Q3 and Q4, and especially in December, as partners placed large orders to beat a January 1st price increase. As we look at our inventory in the field, we see shipments to channel inventory levels that are consistent with prior years. And when we look specifically at where the largest stockpiles are, they're at our largest OEMs and dealers, who choose through those inventories fairly quickly. As we look ahead, we expect to return to more normal pre-COVID order patterns. Our leave times are down to three months, and we've built enough buffer stock that we can easily handle drop-in orders. And from a supply perspective, we've got a clear line of sight to meet almost all component demand for 2023, and our current backlog is sitting at more than 50% of our equipment budget. That said, we had a very strong December, which has led to January and February being a little lighter than planned. However, March orders are back on track, and we expect to return to normal high volumes for the rest of the year. Now let me turn to our current strategic thinking and an update on our major strategic initiatives. As the supply chain environment has stabilized in recent months, we've now turned our attention to better understanding why 70% of North American and 95% of rest of world aircraft have no broadband connectivity. As examples, for some, it's the cost of install. For others, it's quality of current solutions. For others, it's that there's no broadband solution that fits on the air aircraft. There are many other inhibitors as well. We're taking a systematic approach to tackling those inhibitors to accelerate our growth with the following three-pronged strategy. First, expanding our service addressable market by bundling our products in different configurations to appeal to all segments of the BA market. based on variables like size of aircraft, whether they fly in North America or the rest of the world, whether they want to pay more for high performance or less for a more value-oriented product, and whether they fly corporate missions, private missions, or some other mission. Given our choice of networks, LEO or ATG, and our various advanced equipment form factors, from the performance-oriented L5 to the value-oriented SDS, we believe we can bundle different combinations of equipment, service, and networks to fit the needs of every segment of the global market. Second, we want to continue to extend the service revenue life of GOGO equipment installed on an aircraft by continuing to drive advanced penetration, by enhancing the performance of our ATG network to serve the North American midsize and light jet value-oriented segments of the market, and by providing easy upgrade paths to new technologies for advanced customers that are cheaper than replacing our equipment with competitive products. And third, we want to provide equivalent or better network performance and superior customer service to each segment of the VA market at a lower total cost of ownership than our competition. Beyond our major 5G and GBV initiatives, we've launched a series of smaller operating initiatives to address many of the inhibitors I described a moment ago, such as accelerating install times, further improving our award-winning customer service, and developing product pricing and packaging to appeal to each segment of the VA market. These operating initiatives plan modestly to expense in 2023 and 2024, but will help accelerate top-line growth and a step function change in free cash flow in 2025 and beyond. We believe our focus on these areas will build an even more competitive GOGO, better positioned to capture a large portion of the global business aircraft market and creating more value for customers and for our shareholders. Now let me turn to updates on our two major strategic initiatives, 5G and GBB. Initiatives that will take us from delivering single-digit megabits per second today to tens and then hundreds of megabits per second over the next few years. I'll start with 5G. As I mentioned earlier, we're now on track to commercially launch GoGo 5G in the fourth quarter of this year. In December, the CHIP passed critical design review a collaborative effort in which intense scrutiny was applied and transparency visited across all parties working on this chip, including Samsung, GCT, Airspan, and ourselves. The chip is now deep into fabrication, and it's allowing to be delivered to us on time to hit our Q4 target. Once live, our 5G network is expected to deliver speeds roughly 5 to 10 times faster than GoGo's current ATG networks, with peak speeds up to 30 times faster. enabling multiple streaming sessions and video conference applications to be opened at the same time on the same aircraft, and all at a lower cost than competing LEO or ZEO satellite solutions. In the meantime, customers who want GoGo 5G service can install the Advanced L5 system today with full 5G provision and operate on GoGo's 4G network until X3, the box where the chip will lift, is available. For those who pre-provision, Once the X3 is ready, it can be installed quickly, and 5G service can begin immediately, saving downtime and expense. Today, we've delivered 24 pre-provision ship sets to customers. We have 105 end customers that have signed up for pre-provisioning promotions, and we have 92 orders from dealers. Some of the dealer orders may be duplicative of customer orders, but regardless, that is a big jump from the 60 orders we had on our Q3 calls. We also have commits from four OEMs, and they're in discussions with several other OEMs about quarters. And we have certifications in process for 19 aircraft models representing more than 7,000 aircraft from the U.S. fleet. And we expect further certification announcements and incremental momentum with our partners in the coming months. Now I'll turn to TBB. First, a reminder of why LEO. LEO satellites are particularly well-suited to business aviation because of their low altitude, which enables an equivalent leak budget with less power than with GEO satellites, thereby enabling smaller containers which can fit better into the small spaces available for intended installation on most BA aircraft. Over the next few years, we expect LEO satellite technology will allow us to launch service plans that deliver hundreds of megabits per second meet demand from the high performance and heavy intercontinental jet segments of the BA market. Our goals for the global broadband offering are to, one, expand our total addressable market to include the 14,000 business aircraft registered outside of North America. Two, add a satellite feature for the hundreds of US super mid and heavy jets to fly global missions, but have GOGO Avance ATG installed for use over North America. And third, drive enhanced stickiness in our core North American medium-sized and smaller aircraft segments by offering an easy upgrade path to a real product if there needs to pass what ATG alone can deliver. GBB will enable streaming directly from your favorite video 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 continue to make great progress alongside our partners. OneWeb, who will supply the LEO network, will complete launch of its 588 satellite global constellation in April, and should have the network deployed in Arrow ready in 2024. And assuming their pending merger with EGLSAT closes, should have access to funding for their Gen 2 network, which will further improve our GBB performance. On the antenna side, We just completed preliminary design review with our partner Hughes, and have been able to move our schedule to the left by two months, and now aim to launch commercially in the second half of 2024. Our GBV product has received a very enthusiastic response from our OEMs, dealers, partners, and fleet managers. As we've gotten more clarity on competitive plans, it's clear that what we're building is disruptive and highly differentiated on two key factors. First, Our small form factor antenna is designed to work on all size aircraft, while our only current LEO competitor has delivered a large antenna that will work best in the already very competitive heavy business jet segment of the market. And second, GORO is focused on value. We believe our pricing will be more competitive than others in the space. Importantly, we're well positioned to leverage our existing international customer support footprint to support GBB outside the U.S. with 20-plus dealers already in place and 900 narrowband customers in 90 countries today. Let me wrap up my strategic initiative update by saying that we see ATG 5G and GBB as complementary elements of our product portfolio. With 5G targeted to serve value-oriented segments of the North American market, where 86% of all flights take place, and GBV targeted to serve all segments outside North America and the high-performance, super-mid, and heavy jet segments inside North America. I should add that our advanced multi-barrier capability will allow us to serve the super-high premium segment of North American aircraft with LEO and ATG connectivity at the same time, significantly enhancing capacity and providing redundancy for those owners who want it. Despite investments in these two very large strategic initiatives, and the smaller operational investments I described earlier, we're guiding to substantial growth in free cash flow this year. And as these investments roll off, we expect step-function growth in free cash flow beginning in 2025. To wrap up, our accomplishments throughout 2022 have reshaped Godo. We're not just an ATG company. We're driving the next era of IFC technology with the launch of 5G and development of broadband Leo satellite. And the continued penetration of our advanced platform positions us well to extend customer lifetimes and drive free cash flow to invest in further strengthening our business and to return capital to shareholders. In short, we're more resilient, more in demand, more innovative, and more poised for value creation than ever. and our team is energized and excited to deliver on the opportunity ahead in 2023. Finally, in a moment, I'll turn the call over to Barry for his last earnings call as GoGo CFO. But first, I want to thank him for his immense contributions to our company. Barry has been an invaluable leader during a period of unprecedented change, challenge, and growth. He led us through numerous refinancing, without which we would not have survived, He was central to the sale of our commercial aviation business, and he has been a trusted advisor on operational and strategic matters to me since the day I arrived in 2018. So I want to give him my personal thanks, as well as the thanks from the entire GoGo community. We wish Barry all the best in his well-earned retirement. So while we'll miss Barry, we're very fortunate to have a highly qualified successor in Jesse Vetchman, who has run FP&A at GoGo for the last six and a half years, who I credit with making sure we always hit our numbers. Jesse is also on the line today and will walk through our 2023 guidance and long-term targets, as well as be available for questions at the end of our prepared remarks. There is no doubt our finance organization is set up for continued success in Jesse's capable hands. And now, I'll turn it over to Barry for the notes. Thanks, Oak, including for your very kind words. I really appreciate that. Good morning, everyone. We are very pleased with GoGo's performance in 2022 as we set new records both operationally and financially. Our performance demonstrates two foundational elements to GoGo's investment thesis. First, we have proven our ability to deliver strong financial performance, even as we've undertaken significant strategic investments, including GoGo 5G and our global broadband partner. Looking ahead, we will continue these investments in 2023 and 2024 that we advance our technology and execute other operational initiatives to maintain our leadership positions in the growing and under-penetrated business aviation in-flight connectivity market. We expect our free cash flow to accelerate substantially beginning in 2025 as we get these major projects behind us. Secondly, our ability to achieve these results is a testament to the strength of our underlying business model and financial positions. In 2022, we met unprecedented demand for our equipment in the face of significant worldwide supply chain challenges. As these units are activated, these aircraft online produce recurring high margin service revenue that is sticky and is the engine of our strong cash flow. And further, our strong balance sheet provides the flexibility to invest in our business for the long term, both delivery for customers and shareholders today. The 2023 financial guidance and long-term targets we announced this morning underscore our confidence in the business and our strategy. Before we discuss these in more detail, I'm walking through our fourth quarter results. For the fourth quarter, our record total revenue of $108.2 million grew 17% year-over-year. Our top line was driven by record service revenue of $77.3 million, up 12% year-over-year, and 3% sequentially. As we have said, increasing the AOL, and particularly the penetration of our advanced products, is the centerpiece of our strategy in both the North American market and globally, as we also further our GDP initiatives. In the fourth quarter, total H&G AOL increased to 6,935 units of 8% versus the prior year and 2% versus the prior quarter. Advance units online, we've got 3,279 of 31% year-over-year, and Advance now comprises 47% of our total fleet. Our dealers are as busy as ever, and the proportion of shipments to channel inventory levels in 2022 was in line with trends for 2019 through 2021. As Oak mentioned, we expect our exceptional equipment ship in performance in 2022, drive strong activations and service revenue growth throughout 2023. Total ATG revenue grew 2% year-over-year to $3,370, driven by growth in recurring revenue from subscription plans. We expect higher price data plans and the launch of Go Low Pride G followed by GBB to further expand our revenue growth over time. We expect the primary growth driver of service revenue to be from additional aircraft online. Turning to the equipment side, Gova delivered $30.8 million in equipment revenue in the fourth quarter, a 34% increase year-over-year, as we saw continuing very strong demand for our Vans L3 and L5 products. We shipped a record 390 of Vans units in the quarter and 1,334 for the year, a remarkable 50% year-over-year growth in advanced units shared. GOGO delivered service margins of 78% in the fourth quarter. This was a 2 percentage point decrease year-over-year due to the planned higher network costs associated with the deployment of the GOGO 5G network, and a 1 percentage point increase sequentially due to lower maintenance and logistics costs. Our service margins were within our target range of 75% to 80% for 2022, and we continue to expect service margins in the 75-plus percent range over our five-year financial horizon. As expected, equipment margins were down in the fourth quarter to 15%, 5% lower than the prior year period and 4% lower sequentially given by our strategic initiative to drive event penetration. This quarter also included higher excess and obsolete inventory reserves, which we regularly review as a matter of course, and is related to our planned product upgrades and technology roadmap. Now moving on to operating expenses. Fourth quarter combined engineering, design and development, sales and marketing, and general and administrative expenses increased 4% year-over-year to $29.1 million, reflecting development expenses for GBV. On a sequential basis, these operating expenses were 2% lower in the fourth quarter, primarily due to lower legal fees. We anticipated that 2022 would be an investment year for GOGO. It was, but not to the extent we originally planned, due to pushing out of GOGO 5G expenses related to the chip delay. Looking ahead, we expect that 2023 and 2024 will continue to be investment years, as we complete our 5G program and ramp spending for GBV. We expect to see the benefit of these investments through sustained, strong, top-line growth and an inflection point in free cash flow growth in 2025 and beyond, as we have consistently stated. I'll now describe the spending profiles of our GOGO 5G and GBV initiatives, starting with GOGO 5G. As I've mentioned, GoGo's 5G chip is now in fabrication and we're on track and on budget for commercial launch in the fourth quarter of 2023. It's worth noting that we have remained on track with the cost expectations we set back in 2019. The GoGo 5G external development and deployment costs would be approximately $100 million. As we detailed in our third quarter call, we pushed some of the GOGO 5G spending previously expected in 2022 into 2023 due to the delay in the 5G chipset availability. In the fourth quarter of 2022, we spent $6 billion for GOGO 5G, primarily in CapEx. The complete impact of the timing shift for 5G spending from 2022 to 2023 is reflected in our 2023 financial guidance. It's particularly evident in our adjusted EBITDA expectations, which reflects both delayed 5G sales and higher 5G spending in this fiscal year. Now on to our GBV initiative. In the fourth quarter, we recorded approximately $1 million in operating expenses related to GBV. We continue to expect external development costs for GBV to be less than $50 million over three years. However, we have updated our expectations on the timing of those costs. GBV spend was approximately $4 million in 2022, and we now expect it will ramp to $14 million in 2023, with most of the remaining spending to occur in 2024. This is a slight pull forward from our prior review of the timing of our GBV investment. Additionally, we now anticipate that approximately 95% of GBV external development costs will be in OPEX. This spending profile is reflected in our 2023 adjusted EBITDA and free cash flow guidance. I'll now touch on our record profitability. ROVA's record adjusted EBITDA increased 17% year-over-year to $46.2 million, primarily driven by our record service and equipment revenue. We delivered net income of $27.7 million in the fourth quarter, translating to 22 cents in basic earnings per share and 21 cents in diluted earnings per share. As a reminder, our financial statements reflect non-cash income tax expense as we continue to generate positive pre-taxing yield. 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 planning horizon. We continue to expect to see additional reversals portions of our remaining valuation allowance against deferred tax assets within the next 12 months. In the fourth quarter, we generated $25 million in free cash flow, down slightly from $25.7 million from the prior year period due to increased capex associated with approval of IG and increased networking capital. Now I'll turn to a discussion of our balance sheet. GoGo maintains its strong liquidity position as we enter the quarter with $175.3 million in cash and short-term investments. And our $100 million revolver remains undrawn. As of the end of the fourth quarter, we have $714 million in outstanding debt on our term loan deed. Our strong balance sheet provides a foundation to build a significant financial and strategic flexibility. In a moment, I'm going to turn the call over to Jesse to provide Godo's forward-looking perspective, including our capital allocation strategy, as well as our 2023 outlook and long-term targets. But first, I'll provide a quick recap of our 2022 full-year results. Increasing demand from customers for connectivity and Godo's robust business model both contributed to another year of great performance. We generated total revenue of $404.1 million up 20% in 2021, and at the high end of our guidance range, which we increased during the year. We delivered service revenue of $296.3 million, up 14% from 2021, with service gross profit also growing 14%, which is a significant contributor to the free cash flow. Equipment revenue was $107.7 million, up a remarkable 42% in 2021. We reached a adjusted EBITDA of $173.8 million for the full year, up 15% from 2021, and significantly above our guidance range, which we also increased throughout the year. Net income from continued operations was $92.1 million for the year. The decrease versus prior net income from continued operations of $156.6 million was primarily driven by the $187.2 million income tax benefit recorded last year as a result of the partial release of our deferred tax valuation allowance. We also delivered record free cash flow of $57.8 million for 2022, even as we invested approximately $40 million in GOGO 5G CapEx. Overall, 2022 was an outstanding year for GOGO. We're proud of the results we achieved thanks to the very hard work from our entire team. Thank you all for your relentless commitment with customer focus and innovation. Now, I'd like to pass on my suggestion.