Gogo Inc.

Good morning, and thank you for standing by. Welcome to the second quarter 2023 GoGo, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. 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, Catherine, and good morning, everyone. Welcome to GOGO's second 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 our earnings release file this morning and are more fully detailed under risk factors in our annual report on Form 10-K. and 10Q and other documents that we have filed with the SEC. In addition, please note that the date of this conference call is August 7, 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 second quarter earnings release. This call is being broadcast on the internet and available on the investor relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakley.

Thanks, Will, and welcome to our Q2 2023 earnings call. Though GoGo executed well in Q2, the results were not up to our own high expectations. On the positive side, we achieved strong new activations. The advanced platform now accounts for more than 50% of our install base. And we hit some key milestones on our strategic objectives, such as our LEO global broadband product, now dubbed GOGO Galileo. On the flip side, we suffered unusually high suspensions, which we'll cover in detail in a moment. And we suffered a further delay in delivery of our 5G chip, both of which have caused us to take down guidance for the year and in our long-term model. But our few headwinds do not change our view that GoGo is poised for explosive growth in 2025 and beyond. We serve a highly unpenetrated market with 78% of the world's business aircraft flying without a broadband solution today. We see unprecedented demand with a surge of travelers choosing to fly private aviation post-COVID and those travelers demanding connectivity. We have an attractive business model based on recurring service revenue that drives strong cash flow. We're incorporating new technologies into our platform to deliver orders of magnitude improvements in service, to dramatically increase our total addressable market, and to enhance our competitive position. And we have a strong balance sheet that enables us to make the investments necessary to deliver those new technologies. The price for reaching that explosive growth and driving substantial returns for shareholders is the two-year investment cycle we're now in to build GoGo 5G, develop GoGo Galileo, and execute the FCC Rip and Replace project, all of which I will deep dive in a few minutes. This morning, I'm going to start by getting deep into the data for the quarter to demonstrate that many of the headwinds we face this year are temporary in nature. Then I'll update you on our strategic initiatives, and finally, I'll spend a moment on the competitive context in which we're executing those initiatives. I'll then turn it over to Jesse to dive into the numbers and the rationale behind our guidance update. So let me start with demand. In the quarter, we saw a little rebound in demand as measured by flight counts. Google equipped aircraft flew 5% fewer flights than in Q2 2022, but the gap to Q2 2022 actually narrowed each month from minus 7% in April to minus 4% in May and minus 3% in June. And frankly, a gap that small can be explained by the number of aircraft currently caught in maintenance traps at dealers, which I'll touch on in more detail when I discuss suspensions in a moment. More importantly, we continue to see strong growth from pre-COVID 2019 flight counts, with Q2 up 30% from Q2 2019, indicating that we've reached a new sustainable plateau of flight demands. That thinking supported by the latest annual survey of private air passengers from Doug Golan's private jet card comparisons, where 92.3% of those who started private travel during COVID said that they plan to continue flying privately in the future. Meanwhile, usage per flight hour surged 20% over Q2 2022 and up 67% from 2019, indicating that demand for Wi-Fi in aircraft continues to grow. Now I'll turn to drivers of our high-margin recurring service revenue, average revenue per aircraft, ARPA, and aircraft online, AOL. Service revenue for the quarter set a record and was up 8% over Q2 2022, but growth slowed from Q1 as suspensions weighed down AOL. ARPA for the quarter was relatively flat as continuing strong plan upgrades were offset by a shift in product met. as more new Advance L3s came online than L5s. As for AOL, we're having a record year for activations, but sadly, we're also having a record year for suspensions that we feel are putting temporary downward pressure on AOL. More on that in a moment. On the activation front, driving Advance activations is our primary strategic objective because it enables customers to easily upgrade to new networks and technologies with GoGo, as opposed to spending more money and spending more time in the shop installing competitive systems. This should manifest itself in extended customer lifetimes and more high-margin recurring service revenue for GoGo. We had 229 new activations in Q2, our second-best quarter ever, up 13% from Q2 2022 and up 10% from Q1 2023. We're projecting a record 950-plus new activations for the year, up more than 15% from 2022, and a 20% jump in advanced units online. We're also really pleased that in Q2, for the first time, advanced units online exceeded 50% of our total ATG units online, further adding stability to our service revenue portfolio. All that said, we feel that growth in new activations has slowed modestly as customers wait to see how GoGo 5G and Galileo perform and see what potential competitors may offer in terms of product and customer support. Now for the bad news, growth in suspensions and deactivations, which we believe is a temporary issue. For purposes of clarity in this conversation, I'm going to lump transactions that are considered deactivations and reactivations in our customer management system and some that are considered suspensions into one category called suspensions because they're all temporary in nature. To be clear, these transactions include maintenance events about 40% of the time, aircraft sold about 30% of the time, and change of management company about 20% of the time. Q2 was our highest suspension quarter ever, up 31% from Q2 2022, driven by a 33% increase in maintenance suspensions and a 41% increase in management changes. Not only are there more aircraft being suspended, the suspensions are lasting longer, especially maintenance. For example, in January 2022, around 45% of suspensions ended in less than 30 days. In June of this year, that was down to 34%. The primary driver of the volume and duration of suspensions appears to be a log jam for engine maintenance. Many aircraft have been flown hard the last few years, and cannot fly passengers again until they get a major seat check, which usually involves taking the entire engine apart, replacing worn parts, rebuilding it, and then testing it in a wind tunnel. Last week, we asked one of our largest dealers how soon we could book a seat check. The answer, Q2 2024. Why? Because of high demand, part shortages, and labor shortages. Another example of this logjam is replacement engines. In normal times, when dealers remove the engines to work on them, they often install temporary replacement engines so that the customer can continue flying for the duration of the work. We're hearing many reports that there are literally no replacement engines to be had, which is leading to scores of aircraft sitting on tarmacs with no engines. This perfect storm is leaving aircraft stranded on tarmacs across the country. Needless to say, when the aircraft is stuck on the ground, the customer usually decides they don't need to pay for internet. The good news is that once they get done in the shop or complete their management change or have a new owner, those aircraft are coming back online. Since January of 2022, 93% of all suspensions returned within 210 days. So the return rate is very good. We further confirmed the suspension trends I just noted by reaching out to 197 tails that were suspended for more than 45 days in Q2. 66% of those tails responded, with 64% of respondents stating that they were still stuck in maintenance. 15% still owed us money, 6% had returned to service, and 8% had been sold. The rest were scrapped and returned to a leasing agent. What is very important to note is that none had gone to a competitor. As we analyze this phenomena, we believe that suspensions were unusually low in 21 and 22, and are unusually high now, and that when those conditions normalize, we should see a return of roughly 200 aircraft into the active aircraft online pool. Now let me turn to shipments and field inventory. Inventory in the field actually grew by about 30 units in the quarter to roughly 900, but the good news is that the percentage of field inventory committed to a customer rose from 79% last quarter to 85% this quarter, which creates a nice tailwind for us. Roughly 130 units in the field are uncommitted, two-thirds of which are at dealers that regularly hold inventory and sell a lot of systems and where we see little risk. Roughly one-third are at smaller dealers that ordered a system during the COVID supply chain crisis in order to have inventory in case a customer came in wanting an install. And there, there may be some risk of not having an install anytime soon. One other note. We include installed but not yet activated equipment in our inventory account. This generally occurs at the OEMs where we are standard line fit. And a particular customer does not want ATG connectivity either because they don't fly in North America or don't care for connectivity. This installed equipment accounts for about 20% of the inventory account I mentioned a moment ago. The good news is that if those aircraft are ready for activation by a new owner or if the current customer decides they want the internet after all. So now, let me focus on shipments and equipment revenue. Though behind 2023's plan, we had a nice pickup in Q2 with 277 units shipped, up 24% from Q1, generating a 20% increase in equipment revenue. We expect to ship over 1,000 units for the year, which would look good on a historical trendline basis, that pales compared to the blowout 1,334 units we shipped last year. Given our slow start in 2023, we're being cautious about Q3 and Q4 projections, though we think we may see some uplift from our recent LX5 announcement. Now, let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our three prime 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 and networks emerge. And third, we're focused on offering the best product and customer support for each segment of the market at the lowest total cost of ownership. We're making great strides in our strategic initiatives to achieve those goals, including our FCC replacement program, our 5G network, and our GBB-LEO offering. I'll start with the FCC. You'll recall that last year, GOGO was awarded a $334 million grant under the FCC's Secure and Trusted Communication Networks program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our 3G and 4G networks. Because there were more qualified grants than originally planned, all grants were cut back to 39% of the original reward, which in GOGO's case is a cut back to $132 million. At this point, we and most other grant recipients are waiting to see if Congress will fully fund the program as part of its reauthorization of SEC auction authority, which is expected this autumn. Because the functionality of replacement ground-based equipment will be better than the equipment installed in 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 ATG network can manage simultaneously. In the meantime, we started working on the program and received a small reimbursement of federal funds for doing so. On the customer side of this transition, our goal is to convert all of the 3,400 tails flying with our classic product line to new LIUs with LTE air cards over the next few years. We've been in touch with almost all of those customers and have actually spoken to more than 75% of them. And of those that already have a preference, the overwhelming majority are leaning towards an advanced upgrade. Up until now, we've treated this program as an overlay to our long-term model. and excluded it from our financial guidance, except to say that it will be a drain on working capital later this year as we build inventory. Jesse will provide more detail on this program in a few minutes, and this quarter we'll begin incorporating the costs and reimbursements into our guidance, though we must warn you that the exact timing of reimbursements could be very difficult to predict. Now, let me turn to the most disappointing news of the year, the second delay of our 5G chip. Let me start by describing the issue. First, our supplier of 5G airborne and ground station radio technology is Airspan. They, in turn, have a chip supplier, GCT, one of a few firms focused on developing 5G chips. They, in turn, use Samsung to fabricate those chips, and Samsung designates a sub-design house to develop the more standard blocks of the chip outside the 5G and 4G blocks designed by GCT. As the chip was being brought up after fabrication by Samsung, there were three issues identified in the system block of the chip. A detailed root cause analysis was conducted by GCT, and it ascertained that all three issues were related to the same root cause, a software issue in the peripheral subblock of the chip, not an issue in the 5G block. GCT is still working on the exact action plan to fix the chip, but has made us aware of all the options they are considering. all of which point to a mid-year 2024 release of our 5G product, plus or minus a month or two. While this is very disappointing, one has to understand that 5G chips are difficult to design and build because of the dramatic increases in speeds and densification of transistors on the chip surface to enable those speeds. The benefit to us of this technology is that it will enable us to deliver ATG speeds 5 to 10 times faster than our current speeds at around 25 megabits per second mean, and 75 to 80 megabits per second peak, much faster than any ATG competitor, but the con is that we have borne some technology risk in doing so. Meanwhile, we're making great progress with OEMs and at dealers in certifying the equipment we can certify today and in selling pre-provisioning kits to customers. On the good news front, We're excited to announce our new LX5 LRU to support 5G last week. Up until now, if a new customer wanted to install our 5G product, they would have to install two line replaceable units, or boxes, inside the aircraft and add two 13-inch antennas. The LX5 cuts that install down to one LRU plus the antennas. And because the LX5 is the same form factor as our current popular L5 LRU, This dramatically simplifies upgrades for our 2,300 advanced L5 customers. They can swap out their current antennas for MB13s that go into the same location as the old antennas and then pull out the L5 and install the LX5 in the exact same space with the exact same cabling and harness as the old LRU. And finally, because our MB13s can operate on our 4G as well as our 5G network, an advanced L5 customer can pre-provision the MB13 antennas today and only have to swap the LX5 box for the L5 box to upgrade when our chip is ready. To encourage pre-provisioning and drive 5G adoption, if a customer installs L5 and MB13s this year, we'll ship them an LX5 box to swap for free next year. And finally, because the LX5 is one box, not two, it's considerably cheaper than the previous two box 5G configuration. This is part of the GOGO Now and Next strategy and a great example of our advanced platform enabling easy upgrades to new networks and technologies. We're excited to bring GOGO 5G to market and believe it's the perfect product for midsize jets on down that fly North American missions that want great speed at a better value than competitive satellite products. Now I'll turn to our LEO-based global broadband initiative, which we've now branded Galileo. Galileo 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 geo-satellites, thereby enabling global coverage with a smaller antenna that can fit on almost all business aircraft. Last year, we announced our Galileo HDX terminals, a small antenna that fits on almost all business aircraft and targets midsize and smaller jets that, A, are domiciled outside North America and have no broadband solutions today, and, B, are domiciled inside North America and often fly international missions. The exciting news in Q2 was the introduction of the Galileo FDX terminal, a larger antenna that delivers significantly higher bandwidth and targets super midsize and larger jets that fly global missions. We demonstrated a prototype of FDX at eBASE, the big business aviation show in Geneva, where it delivered a solid 190 to 200 megabits per second link up to the plane and 30 megabits per second on the return. Even more exciting is that those speeds will increase dramatically when OneWeb launches its Gen 2 network in just a few years. Our goals for the Galileo family all drive incremental growth for GoGo. They are to expand our total addressable market to include the 14,000 business aircraft registered outside of North America, to add a global satellite furniture for the thousands of U.S. super mid and heavy jets that already have our ATG products today, and third, to 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. A huge advantage of ours is that Galileo is a simple upgrade from any advanced installed aircraft. One only needs to add either our HDX or FDX antenna on the fuselage and then run data and power cabling into the aircraft. This is another great example of our advanced platform making it easy for customers to upgrade from one advanced plan product to another and why expanding advanced penetration is a cornerstone of our strategy. Our satellite partner, OneWeb, has completed its 648th satellite Gen 1 constellation and is well on its way to completing its ground networks before we launch HDX. And we remain on track with Hughes, our intended partner, to deliver HDX in the second half of 2024 and FDX in the first half of 2025. We've received a very enthusiastic response to Galileo from our customers and have already signed a line fit agreement with 1OEM. and have discussions underway with several others. We feel that these strategic enhancements to the advanced platform position us very well in our competitive environment. Most of our traditional geo-satellite competitors, who can only serve large jets because of the size of their antennas, have doubled down on geo-connectivity and have no answer to the dramatic performance improvements LEO and 5G technology will provide to the business aviation market. Our one potential LEO satellite competitor seems to be focused mostly on other, much larger markets that require far less customer support than business aviation. And finally, our old potential ATG competitor has been offering demo flights on which their system performs better than our classic ATG offerings, but nowhere close to what GOGO 5G will offer. And I would suggest they face a daunting task financing a business that will take hundreds of millions in capital to have a chance of making a profit in a market where they face a profitable competitor with a superior product and customer service. Though it's disappointing to take down guidance, I'd like to end on a positive note, which is that we have a lot of tailwinds that should drive performance in the future, including great product launches that should drive CAM, extend customer lifetimes, and drive high-margin service revenue. We have reduced investments after that that should drive free cash flow and We should have increased aircraft online as suspension levels normalize and the 86% of named inventory out in the field gets installed and or activated. I want to end by thanking the frontline GOGO team for the great work they've done, delivering great service and support to GOGO customers, innovating, developing, building and shipping new products, managing our networks and data centers, and working with our customers and distribution partners in the field. And I also want to thank all the GOGO team that supports that frontline team and keeps us on the rails in finance, legal, and people experience. And with that, I'll turn it over to Jessie for the numbers.