Gogo Inc.

Good day, and thank you for standing by. Welcome to Google Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's 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 get an automatic message advising your hand is raised. Please note that today's conference is being recorded. We'll now hand the conference over to speaker host, Will Davis, Vice President of Investillations. Please go ahead.

Thank you, Livia, and good morning, everyone. Welcome to GOGO's fourth quarter 2023 earnings conference call. Joining me today to talk about our results are Oakley Thorne, Chairman and CEO, and Jesse Betjeman, 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 this 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 10K and 10Q and other documents that we have filed with the SEC. In addition, please note that the date of this conference call is February 28, 2024. 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 gap measures in our fourth quarter earnings release. The 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, everybody. 2023 was a busy year for GoGo. We continued to grow our high-margin service revenue and to drive GoGo's strong cash flows, propelled by accelerating adoption of GoGo's advanced platform and fueled by strong business aviation demand for connectivity. At the same time, we're making great strides in our investments to future-proof our business by extending the technology frontier in aviation with GoGo 5G and our low-Earth orbit satellite product, GoGo Galileo. We believe these new technologies will deliver order of magnitude improvements in the speed of GOGO's service, that they'll increase our total addressable market by about 60%, and that they'll extend customer lifetimes by providing easy upgrade paths for existing advanced customers. With the addition of GOGO 5G and Galileo, GOGO will have the most complete product portfolio in the business aviation IFC industry, with products that offer the right performance, the right coverage, the right total cost with great customer support for every segment of the highly impenetrated 39,000 aircraft global business aviation market. We also navigated temporary aviation industry headwinds related to parts and labor shortages and busy maintenance schedules. And though those continue to impact our OEM and dealer partners, we are seeing suspension intervals starting to shorten and reactivation rates starting to pick up. which will hopefully help boost aircraft online this year. Despite the delay in the development of our GOGO 5G chip, the market continues to respond enthusiastically to the 5G value proposition, with ongoing pre-provisioning programs and a flood of STC programs that we believe position us for a highly successful launch late this year. And on top of that, we're executing the SEC Secured Networks Program, support from the U.S. government to enhance the security of our nation's infrastructure and at the same time deliver meaningful benefits to GOGO's network and growth trajectory. As Jesse will describe in a moment, based on our new long-term forecast, we're bullish on GOGO's opportunity for significant growth and long-term value creation. Today, we serve a highly unpenetrated market with 76% of the world's 39,000 business aircraft flying without a broadband solution, and demand for connectivity in those aircraft growing dramatically from both passengers and operators. As a result of these trends, we expect global broadband connectivity penetration across all business aircraft to grow from 24% today to the mid-30% range by the end of our five-year planning horizon. Over that horizon, we expect GOGO's share of global installed aircraft to remain at roughly 75% with our North American share remaining in the low 80s and GOGO's rest of world share going from 0% today to the high 20% range by 2028, which equates roughly to 600 aircraft. To be conservative in our GOGO projections, we've assumed that Starlink achieves its currently published STC schedule and launches a smaller antenna in the next two years. And for planning purposes, we projected as Galileo and Starlink come online, share will shift away from today's geostationary satellite incumbents, and then GoGo and Starlink will benefit from that shift. And though we have to muscle through a tough investment year to deliver 5G in Galileo, our long-term projections are driven by strong recurring service revenue that drives strong cash flow and a strong balance sheet, which acts as a flywheel to drive investment in further enhancing our products and further securing our competitive advantage in the future. Now I'll highlight some demand trends and provide an overview of our Q4 results before I dive more deeply into progress in our strategic initiatives. Demand for Wi-Fi in aircraft continues to grow. Data consumption per flight hour in Q4 was once again up 15% compared to prior year and up 74% from Q4 2019, demonstrating a step change in passenger expectations for in-flight connectivity. Demographic trends bode very well for connectivity penetrations. So all ages want better in-flight connectivity. Demand for connectivity increases as the age of the flyer decreases. GOCO equipped VA 2023 flight counts were down 2% versus 2022, but the gap narrowed to 0.5% in Q4 and actually turned the corner and lost a 2% increase in January over prior year, which certainly signals demand for in-flight connectivity remains strong. I'm sorry, for flight remains strong. More importantly, flights are significantly elevated from pre-COVID levels, with Q4 up 28% from Q4 2019, signaling to many industry observers that stronger private aviation demand is here to stay, which is further supported by strong OEM order books and very strong fractional sales, which we expect will drive GOGO shipment growth over the next few years. Now let me turn to our Q4 performance Revenue was down roughly 10% from our record Q4 2022 performance, which was driven by a 2022 post-COVID surge in equipment orders. On the positive side, we achieved record service revenue in the quarter, driven by record total advance activations, which were up 20% from prior quarter and 15% from prior year, driven by accelerating reactivations and record upgrades from classic to the advanced platforms. At the end of Q4, we reached 7,205 ATG aircraft online, representing 55 incremental ATG units in the quarter, and reached 3,976 advanced aircraft online, representing 192 incremental advanced units in the quarter, up 21% from prior year, and now representing 55% of our installed base. We view every addition of an advanced unit whether a new customer or an upgrade, to be a strategic win for GOGO because it extends the lifetime value of that customer. That's because once an advanced platform product is installed, it is far easier and cheaper for a customer to upgrade to new technologies, such as 5G and LEO satellite connectivity, with GOGO then moving to a competitor's product to upgrade that technology. The reason for that is generally the only work inside the aircraft upgrade to a new technology with AVANCE is to add or replace an antenna on the outside of the aircraft. The rest of the upgrade can be achieved on the AVANCE box inside the aircraft with a simple software upgrade. This gives GOGO a huge advantage in our distribution channels because AVANCE is already line fit on every currently produced make and model of aircraft. OEMs have lower engineering and line fit cut-in expense when they adopt 5G or Galileo than a new product from one of our competitors because they have already engineered and tuned their production for the go-go equipment that goes inside the aircraft. On the dealer side, because there are already STCs for advanced and all makes and models of business aircraft, they can upgrade their STCs or field approvals far more quickly than doing whole new designs for competitive products. And on the fleet front, if they have advanced installed, they can invest in one set of advanced hardware inside the aircraft and then upgrade incrementally by adding antennas at far lower cost than replacing full systems. To give an example of where we think this will work to our advantage, today there are more than 2,100 heavy jets flying with GOGO ATG connectivity in North America, many of which also utilize geostationary satellite products when they fly outside North America. Today, 61% of those have Avance installed, providing an easy path to upgrade from GEO to LEO connectivity when they so desire. We believe this advantage will only grow as we migrate the 3,200 customers still in our classic ATG products to the advanced platform as part of our FCC secure networks program customer conversion campaign. Moving from service revenue to equipment, though shipments paled compared to our blockbuster year last year, 2023 was our second highest advanced shipment year ever, which we believe portends more good things for the strategic customer reasons I mentioned a moment ago. And finally, given the strong activations last year, go-go inventory in the field normalized, and we're now down to roughly 180 units in the field that are not committed to a particular buyer, of which only 37 are at dealers that do not regularly move large amounts of inventory. On the earnings side for the quarter, despite our revenue headwinds, EBITDA came in higher than planned, and free cash flow set a new record, which demonstrates the durability of our business model. I'm proud of the GOGO team and want to thank them for their commitment to our strategy and strong execution throughout 2023. Now, for our progress on our strategic initiatives. GOGO is focused on accelerating growth with a three-pronged strategy. First, we want to expand our addressable market globally by expanding outside North America and developing products and pricing that fit every segment of the 39,000 aircraft global market. Second, we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide an easy upgrade path as new technologies emerge. And third, We're focused on offering the best product and customer support to each segment of the market at the lowest total cost of ownership. And we're making great strides on our strategic initiatives to achieve these goals. Let me start with 5G. I'll begin with a little bit of bad news, which is that due to a non-technical contractual issue between sub-suppliers, we've had a slip in our 5G delivery from Q3 to Q4 of this year. We believe that issue has been resolved, and we are back in fabrication mode on the chip. Despite the shift in timing, we're really encouraged by the commercial and certification progress we're making bringing this product to market. We've already shipped 198 5G pre-provision kits with MV13 5G antennas, 59 of which have already been installed and are flying today on our 4G network with an L5 4G box. Once our chip is ready, we will start shipping the LX5 box to those customers. And because the LX5 and L5 have the same form factor, they can make a quick swap and begin 5G service immediately, saving downtime and expense. We have orders from five OEMs, one of which is already line fit installing the MB13s, and we have stock orders for 46 systems from our dealer network. On the certification front, We have 31 STCs in work, representing 41 aircraft models and more than 9,700 North American jets. Of those, 10 STCs have already been completed for the MB-13 antennas, and because the LX-5 is the same form factor as the L-5, will be quickly upgraded once we ship them the LX-5 boxes with the 5G chip inside. The other 21 programs are awaiting the LX-5 before completing work, which again, because they're the same form factor, is a relatively modest buffer. We also hit an exciting milestone earlier this month when we received our first FPGA version of the 5G chip and began testing the 5G chip software in our Chicago lab. We're excited to bring GoGo 5G to market. And with mean speeds around 25 megabits per second and peaks of 75 to 80 megabits per second, we believe it's the perfect product for midsize and smaller business aircraft that fly North American missions and want great connectivity at a better value than competitive satellite products. Galileo. Let me turn to our LEO-based global broadband initiative. Galileo comes in two versions, a smaller HDX terminal and a larger FDX terminal. Galileo HDX terminal is a small antenna that fits on almost all business aircraft and targets, A, the almost 12,000 midsize and smaller jets that domicile outside North America and have absolutely no broadband solution today, and, B, those jets out of the 11,000 midsize and smaller jets that domicile inside North America that often fly international missions. The Galileo FDX terminal is a larger antenna that delivers significantly higher bandwidth and targets the roughly 7,000 global super midsize and larger heavy jets that fly transcontinental missions. For Galileo, peak speeds and mean speeds will be in close proximity, with HDX delivering speeds to the aircraft in the high 50 megabit per second range and FDX delivering speeds close to 200 megabits per second. which is comparable to the speed Starlink publishes for its 39-inch antenna. As I mentioned earlier, a huge advantage for us is that Galileo is a simple upgrade from any advanced installed plane. One only needs to add our HDX or FDX antenna on the fuselage and then run data and power cabling into the aircraft. As I also mentioned earlier, given that advanced is already a line fit option at every OEM, and has STCs on every currently produced model of aircraft, it will be relatively easy from an engineering certification perspective for OEMs and dealers to offer Galileo as an option to their customers. We've already signed one line fit agreement and have discussions underway with several others, and six GOGO dealers have already either verbally committed or are under MOU for 10 STCs representing 28 different aircraft models and a global TAM of 8,000 aircraft. We remain on track to start shipping HDX terminals in Q4 and HDX terminals in the first half of 2025. We hit an exciting milestone this month when we received the first fully constructed prototype of the Gogo Galileo HDX antenna, which marks a significant step in design validation, preparing for flight tests this summer. With that, we're one step closer to our goal of offering a global broadband connectivity solution for every business aircraft everywhere. Now, let me turn to the SEC Secure Networks Program. You'll recall that two years ago, GOGO was awarded a $334 million grant under this program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our 4G network. Because there were more qualified grants than originally planned, funding for all grants were cut back to 39% of the original award. which in GOGO's case was a cutback to $132 million. As we mentioned last quarter, the White House included full funding for the program in its supplemental funding request to Congress last year. Given that full funding has brought bipartisan support to Congress, we feel that it has a chance of passage this year. Partial funding will cover about 70% of our reimbursable cost of replacing all EVDO ground equipment and moving GOGO Classical customers to advanced equipment that is compatible with the replacement ground equipment. And that is what we are projecting in the long-term guidance we shared today. Based on changes we've made to our evolution program, we no longer believe we will need nor would we receive $334 million. However, if full funding is approved, we would be able to accelerate our program and cover all reimbursable costs. On the customer side of this transition, our goal is to convert all 3,200 tails still flying with our classic product today to new LRUs with LTE air cards over the next two years. And we are funding very attractive conversion rebate plans to encourage them to do so. We've been in conversations with more than 95% of these customers. So far, 55% have indicated a preference, with the overwhelming majority leaning towards an advanced upgrade, and almost half of those choosing L5s over L3s. This program has considerable benefits for GOGO and its customers, including a 40% improvement in connectivity performance for Advance L3 customers, a doubling of the number of aircraft that the ATG 4G network can simultaneously manage, and an acceleration of GOGO Classic customers upgrading to Advance, which has the strategic benefit of extending GOGO customer lifetimes due to the ease of upgrading to 5G and Galileo and other new technologies I described a few moments ago. Perhaps the biggest news in the quarter was announced after the quarter was over, and that is the 10-year extension of our 20-year relationship with NetJets. NetJets is by far the largest operator of business jets in the world, with roughly 600 aircraft in North America, which they plan to go to 1,000 over the next five years, and another 85 aircraft operating in NetJets Europe. Of the North American aircraft, Roughly 40% are on Avance today, and 60% are classic GoGo ATG products. They are planning upgrades to Avance for all their North American aircraft, and then future upgrades to either 5G and or HDX, depending on mission. NetShed's Europe flies 70 aircraft that are equipped with GoGo equipment today, largely to provide in-flight entertainment, but 40% of those are already on the Avance platform, and they plan to upgrade all of those 70 to Avance, with the HDX Galileo antenna. Most importantly, NetJets is the bellwether of the business aviation industry. In order to curry business with NetJets, OEMs and dealers make sure that they can provide the products and service that NetJets wants to install, and that should create great pull-through demand for GOGO. As I mentioned at the outset, 2024 is an exciting year for GOGO as we deliver GOGO 5G and Galileo and continue to execute on our strategies. We are more in demand, more innovative, and more poised for value creation than ever. Now I'll turn it over to Jessie for the numbers.