Gogo Inc.

Good day, and welcome to the first quarter 2023 GoGo, Inc. earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand has been raised. To lower your hand, press star 1-1 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations, Will Davis.

Thank you, Andrew, and good morning, everyone. Welcome to GOGO's first quarter 2023 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO, and Jesse Betchman, Executive Vice President and CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on the conference call. Those risk factors are described in the earnings release file this morning. and are more fully detailed under risk factors in our annual report on form 10K and 10Q and other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 3rd, 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 first quarter earnings release. This call is being broadcast on the Internet and available on the Investor Relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.

Thanks, Will, and good morning, everyone. Thanks for joining us today. I'll focus my remarks on three main areas. First, I'll provide a state of the business aviation industry as seen from GOGO. Second, I'll provide key highlights of GOGO's first quarter results. And third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jesse will then walk through our quarterly performance and 2023 outlook before we open up the call to your questions. So let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre-pandemic period. driving excellent new installation numbers for GOGO, which we expect will translate into high margin current service revenue, the primary driver of GOGO's long-term value creation model. Though dealers and OEMs are still navigating some supply chain and labor woes, the avionics industry is in the midst of return to normal operations, though at higher levels, as I noted a moment ago, and with some bumps still in the road. For GOGO, That means dealers are returning to normal order patterns. Due to the extended lead times induced by COVID and fear that supply may not be available at all, many dealers ordered more equipment than they had immediate need for over the past two years, culminating with our record-setting Q4 2022 shipments. Fortunately for GOGO, our great production ops team was able to meet that demand. However, as lead times have come down, dealers can use current inventory for new orders and don't immediately need to backfill for those installs, which is why despite having our second best new install quarter ever, we do not have as much equipment revenue to show for those installs as we normally would. We've seen this movie before. After a very strong Q4 in 2020, we suffered a 30% decline in equipment revenue in Q1 2021. only to finish 2021 with very strong equipment revenue growth for the year. We also saw this in 2019-20. Regardless, we're confident that our record 2022 shipments will translate into strong activations in 2023. According to our dealers and OEMs, 75% of go-go inventory in the channel now has either a named customer or an aircraft serial number associated with it. As for the rest of the inventory, we expect demand to take care of that. However, we're also launching some dealer incentives to help that process along, and we're working with some of our smaller dealers to shorten install times so that they can sell GoGo as a standalone outside of a large maintenance event. We've had some great success thus far and have brought standalone upgrade install times down to five to seven days with some dealers and are on track to get advanced upgrades times down to three days on some models with another dealer. In general, the larger dealers are extremely busy. The elevated flight activity that started with COVID is accelerating the pace at which planes need to get in for required inspections and maintenance events. Many charter and fractional fleets literally have planes parked on the tarmac, grounded, until they can get into the shop for maintenance. dealers continue to suffer labor shortages and some parts shortages. For GOGO, this has translated into more opportunities for dealers to install our equipment, but that's been tempered by dealers sometimes not having enough workers to install our equipment if the work is to occur during a fixed maintenance window. Similar post-COVID return to normalcy trends temporarily impacted our AOL count in the first quarter. The first is the higher level of maintenance events, Most owners turn off their go-go service while they're in the shop or grounded on the tarmac waiting to get into the shop. The second is the increase in secondhand aircraft inventory. Though still well below the historical average of 5.6% of the U.S. fleet, there's been a big jump in used aircraft for sale this year, from around 2.5% to 3.6% of the fleet, which impacts our AOL because customers typically turn off their Wi-Fi when they park the aircraft for sale. However, those sales are also an opportunity, as the new owners usually reactivate their service and often upgrade before the plane comes back into service. Taking a step back, GOGO's installed base is evidence of both our strong market position today as well as the immense opportunity we see ahead. Of the 15,000 business jets in the North American market, almost 50% of them have a GOGO IFC system installed today. of which almost half are installed with Avance. Avance is a perfect stepping stone for high-performance-oriented customers with easy upgrade paths to either 5G or GBB, as they both utilize the same Avance infrastructure on the airplane, making it easier and cheaper to stay with GoGo and upgrade than to move those competitors' products. For this reason, the continuing to expand Avance penetration is a cornerstone of our strategy. Meanwhile, based on our research, the rest of our customers, that's non-events, are generally satisfied with their current GoGo Classic product, which will continue to benefit from improvements to our ATG network. Our loyal install base provides a solid financial foundation for our business for years to come, and the other 50% of the business jet segment and the highly unpenetrated 10,000 aircraft turboprop market represent an opportunity for future growth. So let's move to our Q1 performance. The message is that despite some bumpiness as the industry returns to pre-COVID patterns, we had our second best new install quarter ever and our best first quarter installs ever. We delivered first quarter revenue of $98.6 million, up 6% over prior year, driven by record service revenue, our primary value driver. The impacts on our equipment revenue were most significant in January and February, but in March, shipments were back on track. April was much better than January and February, but still a little off track. So we feel we're on the right trajectory, but still a wood to chop to get back on flame. Our operating metrics for the quarter were strong, with twice as many customers upgrading service as downgrading, and continuing strong aircraft retention rates of greater than 90%. On the bottom line, GOGO delivered first quarter adjusted EBITDA of $39.7 million, down 7% year over year, reflecting softer equipment revenue, as we just discussed, and increased spending on our strategic initiatives, which Jesse will discuss in a moment. As for guidance, the factors I discussed in my business aviation State of the Union persist. However, we believe we're poised for strong performance in the second half, especially given the pent-up demand we see for GOGO 5G, and we still expect to finish the year in line with the full year 2023 revenue. Adjusted EBITDA and free cash flow guidance were reiterated this morning. Now let's turn to the drivers of business aviation demand. The underlying secular trends driving demand for business aviation connectivity remain strong and continue to support our growth runway. Passengers who flew commercial but could afford private aviation tried flying private during COVID and have generally not gone back to commercial. Many have now ordered their own jet or a fractional interest in a jet. Second, the demographic of passengers is going through a shift to a younger generation that expects high-quality Internet connectivity wherever it goes. And last, almost all passengers went through a technology transformation during COVID. We all lived in isolation and had to master heavy data consumption apps like Zoom or Teams for work and Instagram or Snapchat for our social lives. These trends drove a 137% increase in data usage across our networks between pre-COVID Q1 2019 and Q1 2023, and a 79% increase in usage per hour over the same period. Though flight counts are not a revenue driver for our business, Industry observers use that as a proxy for demand. Our go-go fleet flights in Q1 were about even with prior year, but up approximately 30% compared to Q1 2019, which represents significant growth in the overall market. Additionally, Wall Street analysts project that OEM jet deliveries will hit 700 this year, up from 565 three years ago, and with currently committed purchases will grow to almost 800 in 2025. Our OEM relationships are very important to us. And advance is either standard or an option on all 29 models of aircraft currently in production. This is a huge advantage for us as we launch 5G and GBB. They are merely extensions of systems that are already certified and installable on all makes of aircraft. Now let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our three-pronged strategy. First, We want to expand our service addressable market by broadening the advanced platform product offering and adding networks to meet the needs of each segment of the BA market globally. Second, we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide easy upgrade paths as new technologies emerge. And third, we'll offer the best product and the best service to each segment of the market the lowest total cost of ownership. We're making great strides in our strategic initiatives to achieve those goals, including our 5G network, our GBB LEO offering, our FCC replacement program, and the numerous operating initiatives I discussed on the last call. So let me start with our GoGo 5G system. We remain on budget and on track for a commercial launch in the fourth quarter of this year. 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 25 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 lower costs than competing satellite solutions. In the meantime, customers who want GOGO 5G service can install the Advanced L5 system today, full 5g provisions and operate on gogo's 4g network until the 5g x3 box is available once the x3 is ready it can be installed quickly and 5g service can begin immediately saving downtime and expense we're extremely pleased by the market's excitement for gogo 5g evidenced by our pre-provisioning momentum we delivered 52 pre-provisioned chipsets to customers in q1 we have 116 end customers that have signed up for pre-provisioning promotions and we have 98 dealer purchase orders in-house. We also have order commitments from four OEMs and are in discussions with several others, and we have SDCs in process for 20 aircraft models representing roughly half of the business jets in North America. Now, turning to our LEO-based global broadband initiative, which adds an electronically steerable antenna to the advanced platform, and adds the one-web low-Earth orbit satellite constellation to our network offerings. LEOs are particularly well-suited to business aviation because their low altitude enables an equivalent link budget with less power than with geosatellites, thereby enabling a global coverage with smaller antennas that fit better on most business aviation aircraft. Our goals for the global broadband offering are to, first, Span our total addressable market to include 14,000 business aircraft registered outside of North America, most of which have no access to broadband connectivity today. Second, to add a satellite feature for the thousands of U.S. super-mid and heavy jets to fly global missions that have GOGO Advanced ATG installed for use over North America today. And third, drive enhanced stickiness in our core North American medium-sized and smaller aircraft segments by offering an easy path to add a LEO product if they desire more capacity. We expect 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, the same service levels you expect in your office or living room today. We continue to make great progress alongside our partners. OneWeb will supply the LEO network, completed launch of its 588 satellite global constellation in April, and is on track to have the network deployed and aero-ready in 2024, as expected. We completed preliminary design review in February with Hughes, our partner on the antenna side, and are currently on track to deliver GBB commercially two months ahead of schedule in the second half of 2024. Our GBB product, has received a very enthusiastic response from our OEMs, dealer partners, and fleet managers. And we hope to have some exciting news on that front in the not-so-distant future. Now let me talk about a couple of competitive advantages of GBB. First, our small form factor antenna is designed to work on all-size aircraft, while our only current LEO competitor is trying to deliver a very large antenna that will work best in the already very competitive heavy jet segment of the market. Second, GOGO offers much better customer service in a very small but complex and service-sensitive market. And third, GOGO will be the only in-flight connectivity provider that can deliver a combination of LEO and leading ATG services, enabled by our unique advanced multi-barrier capability. Together, the combination of GOGO 5G and GBB will deliver a truly unparalleled experience for passengers using heavy data applications like Zoom or gaming, offering a unique performance advantage over competitors by virtue of our proprietary ATG spectrum and technology. Importantly, we're well-positioned to leverage our existing international footprint to support GBB customers outside the U.S. With 20-plus dealers already in place and 900 narrowband customers in 90 countries today. Before turning it over to Jesse, I'd like to provide an update on our SEC reimbursement program. Last summer, GOGO was awarded a $334 million grant under the Federal Communications Commission's Secure and Trusted Communications Networks Program. It would reimburse the company for expenses associated with accelerating the removal of Chinese telecom technology from its 3G and 4G networks. Because there were more qualified grants than originally planned, all grants were cut back to 39% of the original award, which in GOGO's case is $132 million. Legislation with bipartisan support has just been introduced. It would fully fund the grants awarded by the FCC, and we are hopeful that that will be approved. Because the functionality of replacement ground-based equipment will be better than the equipment installed on our 3G and 4G networks today, GOGO will get some significant benefits from this network refresh, including a 40% improvement in connectivity performance for Advanced L3 customers, and an almost doubling of the number of aircraft the network can simultaneously hand. Jesse will provide some directional guidance on the expected financial impact of this program, which is not yet reflected in our guidance, and which we will address on our Q2 earnings call. Jesse will also provide more detail on our recent $100 million debt pay down and our Moody's upgrade. I will just state that we are committed to using our capital wisely. While returning capital to shareholders remains a priority, given the current interest rate environment and that our interest rate hedge will come down by $125 million in July, we thought it was most prudent to reduce our leverage at the current time. Overall, we're excited about the future and believe GoGo has the right strategy in place to continue to capitalize on the significant opportunity in our market and deliver long-term value creation. We're confident that our fundamental business model provides a strong foundation to support the strategic operational initiatives we have underway, and that our investment strategy continues to support a release of free cash flow in 2025 and beyond. And now I'll turn it to Jessie for the numbers.