Good morning ladies and gentlemen and welcome to the Q4 2020 Gogo Inc. Earnings Conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. William Davis, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Deb, and good morning everyone. Welcome to Gogo's fourth quarter 2020 and full year 2020 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, President and CEO; Barry Rowan, 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 financial 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. These risk factors are described in our earnings press 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 have filed with the SEC. In addition, please note that the date of this conference call is March 11, 2021. 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'll present both GAAP and non-GAAP financial measures. We have 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 press release. This call is being broadcast on the Internet and available on the Investor Relations section of the Gogo website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we will host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks, Will and good morning everyone. And welcome to our first quarterly earnings call as the new Gogo. Obviously, the highlight of the fourth quarter was clearly a completion of the sale of our CA business to Intelsat for $400 million. And today, we're more focused company within industry leading technology, a strong market position, a dependable recurring revenue model and a stronger balance sheet, all positioning us well for the long-term growth. This morning, I'll walk through the highlights of our financial results of continuing operations for the fourth quarter and full year 2020, give some color on market trends and competitive advantages that we believe will drive the new Gogo's long-term deployments, and describe how those factors contribute to our outlook for fiscal 2021 and beyond. And I stress beyond because 2021 will still be impacted by COVID and we'll still bear transition cost as we migrate from being a bigger unprofitable company to being a smaller profitable company. Let me start with the fourth quarter results. The impact of COVID-19 on our 2020 results can't be overstated. However, I think our team managed extremely well in an extremely challenging environment, and I want to give kudos and thanks to them. We executed a comprehensive 16 lever cost reduction strategy that enabled us to preserve cash and run a leaner more efficient operation. We completed the sale of the CA business showing up the balance sheet and focusing our resources on an attractive resilient market where we have de-competitive moats. And we actually expanded our install base growing our ATG Aircraft online or AOL by 2% year-over-year. Gogo delivered Q4 2020 total revenue from continuing operations of $77.6 million down only 10% year-over-year, not bad when you consider that most business travel was still at a standstill in…

Thanks Oak. I'd like to begin by highlighting three key themes running through my remarks today. First, the strong rebound in business aviation is driving continued improvement in our top line. Second, the closing of the CACL positions us to leverage the favorable economics of our proprietary ATG network and industry leading AVANCE platform, enhancing the long-term value creation potential of our business. Third, closing the transaction materially improved our balance sheet and financial outlook, this positions us well to execute a comprehensive refinancing this spring that will align our capital structure with our new business and result in rapid deleveraging. Turning now to the details of our fourth quarter results from continuing operations. Total revenue for the quarter was $77.6 million. While this was down slightly less than 10% from the prior year period, total revenue grew nearly 17% sequentially. This is solid evidence of the business aviation industry's continuing recovery from COVID. Service revenue was $56.9 million down 3% from the prior year period. This was driven by a 4% decrease in average monthly connectivity service revenue per ATG unit online or ARPU. This decrease was partially offset by a 2% increase in ATG units online. On a sequential basis, service revenue increased 7% as ATG aircraft online and ARPU both increased by 4% and 2% respectively. Gogo delivered equipment revenue of $20.7 million in the fourth quarter of 2020. This was a 57% increase from the third quarter as both L5 and L3 AVANCE products shipments finish the year strongly. This growth is attributable to strong pent-up demand for the AVANCE platform augmented by promotions and accelerated year-end shipments. As Oak outlined, driving penetration of the AVANCE platform into our installed base and with new customers is a centerpiece of our long-term strategy. Adding to the installed…

[Operator Instructions] Our first question comes from the line of Scott Searle with ROTH Capital.

Hey, good morning. Thanks for taking my questions. Oak, Barry and team hope you guys are all healthy, safe, your families and your teams. Congratulations on the quarter. It's hard to imagine 12 months ago heading into the pandemic, we'd be sitting here today talking about the new Gogo with this kind of financial performance, so congrats again. Maybe just to quickly dive in, Oak, I'm wondering if there's any additional color or metrics as it relates to now the core BA services business related to geographies or 10% customers, any color that you can provide there? It seems like there's a lot of disparity in terms of some of the flight data related to the Northeast versus the South. Do you have any other exposures there that we should be thinking about?

Well, in terms of geography, we're obviously most of U.S. bound because that's where our ATG network is. In terms of flight patterns, I mean, I don't think there's anything that is going on that negatively affects us. We see flights this year, or during COVID have been slightly longer, people have been traveling further distances. Our data consumption has been up, as we noted, there's more flights per aircraft. That's because the charter and timeshare folks are really getting hit hard. They've got a lot of demand. So, I think that's good, because they will press more aircraft into service, which would mean more installs for us. So, we like that trend. So Scott, does that answer your question? Or are you looking for something else?

No, just looking for any sort of geographic mix within the United States, places like Florida, Southern California have had a lot more flight activity than the Northeast, for instance. But you guys have been growing faster than the industry in terms of the recovery of aircraft that are online, as well as your revenue per aircraft. So, I just didn't know if there was any additional color or things that you're thinking about in terms of metrics going forward on that front? Although you provide a tremendous amount of granularity today.

Yeah, I mean, I think in one sense, we're fortunate in that we're so North American centric. Because where you see business aircraft really taking a hit is in global travel. And there's very little global travel taking place right now. So, if your - if most of your install base is in large jets that are flying internationally, flights are down. And now most of those competitors, they're on service plan. So, if people don't cancel, that doesn't matter that much. But if they do suspend their accounts, while they're on the ground, because they're not flying, obviously, that would hit their revenue. We've been fortunate. It's bounced back very quickly here. We're not all the way back, but we're close to former flight levels. And as I noted on the call, we've had suspensions. But most of those have come back, there's still some out there, but not that many, and hopefully we'll get those back over the next couple of months. And we had some plan downgrades to pay as you go. So, people wouldn't have to pay while their planes were on the ground. But that the plans have really come back strong and a lot of people have actually bought up as they came back. So that's been helpful, and that's why we had a bounce back in ARPU. So,

Great. If I could just Barry a clarification on the OpEx, I think you said $12 million this year for 5G. You want to make sure is s that what's flowing through the P&L? Is that the total cost or some of that being capitalized just in terms of how we think about that? And then also, the component availability impacting the deployment? Is that having any impact in terms of your ability to deploy just ATG equipment on the aircraft themselves, the L5 AVANCE solution? And lastly, if I could Oak, that 10% long term growth target. I'm wondering how you think about in terms of penetration of the different aircraft, turboprop has been a very underpenetrated category in general, but smaller aircraft. I mean, are you seeing enough opportunity in the larger aircraft that's really driving that 10% plus growth over the next five-year period? Thanks.

Yeah, I'll start with the two parts of that and I'll turn it over to Barry for the first part. We're not counting on a lot of turboprop penetration to drive that growth rate. That growth rates, just under 8% of that is units and the rest is ARPA. So, we see that opportunity frankly in the light, medium and large size jets right now. And as we look at it, when we look at our addressable market and we project forward five years, we are including the turboprop market in this data, the market is still 60% unpenetrated. So, there's just a lot of room in this market to grow. And Business Aviation there is a slower adopter than Commercial Aviation or some other verticals. So, the answer the first question - the last question is that we're not really counting on turboprop. The other question you've noted was the delay in supply chain, now really, we've gotten ourselves caught in the world chip shortage crisis here a little bit and the demand is hitting chip manufacturers in this just one manufacturer in particular, that's a supplier to one of our partners in the 5G project that had to go back and retake a chip and had to get back in line behind the whole bunch of other demand. And so that's the way that's pushed us into 2022. It doesn't affect L5 at all. It's a 5G chip. So that's what that situation is. Barry, I'll turn it over to you to discuss further.

Yeah, let me comment on that, Scott. So, the $12 million that we cited, so it's $12 million in OpEx and then $12 million or so in CapEx. There's a few million dollars of capitalized internal costs on top of that, but the lion's share of that are the numbers that I'd cited.

Great. Thanks so much, guys. Nice quarter.

Thanks, Scott.

Thanks, Scott. Appreciate it.

Your next question comes from the line of Ric Prentiss with Raymond James.

Hey, good morning guys. Hey, glad to have 2020 behind us and navigated very well through it. And thanks for all the details today and a lot of visibility into stuff. I'd like to focus on the 5G project, help us understand what kind of speed and capacity that's going to bring to your customers? And I think I heard you but I want to just confirm, what do you think that's going to help with ARPA?

Yeah, I'll jump on that. We haven't given exact data in terms of the speed, exact speeds, because everybody plays with those numbers. And frankly, we don't want to get into that game with competition. But the way to think about it is that it is 10 times faster than our classic ATG product. And 5 times faster than the current L5 speeds. So, I think it's a significant improvement. And our customers are going to love it. So that was the first part of that Ric. What was the other part of your question? I'm sorry,

Yeah, as far as what increases capacity and also the ARPA [Indiscernible]

Yeah, on ARPA. Yeah, that it will help ARPA because, 5G will be priced at a higher price than the classic product is in terms of service plans. And, yeah, it's a bump to ARPA.

Okay, and to the previous question. I think you threw out kind of a thought about the 10% long term growth rate, how much is units and how much is ARPA behind this?

Yeah. So about 8% units and 2% ARPA.

Okay. And then, Barry on the 5G spend. I think I heard through year end '21, you'll have spent about $41 million. So, does that imply maybe $60 million gets spent in '22 with about 10 of that OpEx and 50 CapEx is that how we should think about that?

Yeah. Most of it gets spent in 2022. Ric, there is a little bit of a tail on the spinning beyond 2022. For CapEx, as you know there are kind of two phases of the CapEx spend initially, it's to provide the nationwide coverage. And then capacity gets added after that. But the lion's share of that CapEx spend is, I mean, within a few million dollars is done by the end of 2022. And then OpEx is virtually all done by the end of '22 just a little bit left after that. We talked about the importantly, the maintenance, ongoing CapEx of $15 million to $20 million beyond '22, I think is a really important point. Because when you look at the cash flow, generative capacity at the business, it really picks up after that investment bolts in 2022.

And, we really like looking at the free cash flow and valuing companies as well. When you think about margins, Oak, I think you've mentioned that margins would be steady, wondering why they couldn't grow over time given as you roll out a new network, and then you sell extra revenue on top of it, what would keep margins in that 35 to 40 range instead of being able to grow over time?

Ric, I think they could grow overtime. And we're probably going to start more towards the bottom of that range and grow towards the top of it over the five years. We also, we see opportunities to invest further and enhance growth and enhance upper margins, we will. And the AVANCE platform really does give us the opportunity to do that in a very cost-effective manner, which would help margins.

Make sense. And last one from me, you've mentioned [Indiscernible]?

I'm just going to add to that Ric, is that, we do see very strong continuing margins, on the service margin side of things. As we've talked about, a key component of our strategy is to drive the penetration of AVANCE and then 5G, so we've tried to be very conservative about what we expect equipment to be overtime, and we want to be able to accelerate that equipment installation as 5G gets rolled out too. So, certainly there's obviously an investment there. [Multiple Speakers] Yeah, we do get the benefit of the reduction in the G&A expenses also starting in 2022.

Make sense, last one for me, you mentioned growth initiative a couple of times, what is it is on the wish list that you would like to have or might be good to have just kind of thematically?

Well, an example - Two examples today would be obviously 5G, which is from an equipment perspective, if you have AVANCE L5, you're pretty much all the way to 5G, you get the antennas that are on the plane, they come off and other antennas go back in the exact same screw holes in the exact same place. So, that's a very easy install. And initially, you're going to need to add a small box next here AVANCE L5 box. But most of the workings happen in the software. Overtime, we hope to not even have that small box that you have to add. So, that's an example of an upgrade to our current platform that will significantly enhance performance and is really cheap install, because you're leveraging the AVANCE platform much cheaper than going to a competitive product. The Gogo Vision is another example, that leverages AVANCE today. And today, when we ship AVANCE software, Gogo Vision is already in there, it's got a key and if you want to, and we can do things like run promotions, where we let people use it three to six months, and they have a right to buy it. And if they buy it, it's just turned on permanently with a software key remotely. And that obviously is very high margin and helps ARPA over time. So, those are examples. I don't think we want to get into anything too specific Ric, in terms of what we're thinking about right now, just for competitive reasons. But I think we seen a lot of different opportunities. We want to be very careful in selecting those and make sure that they give us strategic benefit, as well as a very high return on invested capital for our shareholders. And I think we'll probably have more to say about those opportunities in the future.

Great. Well, I hope you, your family, employees continue to say well, thanks, guys.

Thanks a lot, Ric.

And your next question comes from Louie DiPalma with William Blair.

Oak, Barry good morning.

Good morning. How are you doing?

Good morning.

Barry, can you reaffirm what you just discussed about the net operating losses if there were to be a change in control? Did you say that now you would have the ability to retain them, if there were change of control?

Yes, under the current tax law, we would be able to retain a meaningful majority of those. There are a couple of rules that apply to that. One is that the law currently allows for a net unrealized built-in gain, NUBIG. So, if the calculation is based on the value of the company, then you can spread that over five years. So, we would that current stock prices retain, in the order of $500 million of those of annual values. So, meaningful portion, and particularly when you look at across the five-year planning horizon, that would really largely cover the income for an extended period of time.

Thanks. I think that is material. And for Oak, many investors have used Gogo's, for Oak, Gogo's service on commercial airlines such as Delta and at times, the user experience was poor due to capacity limitations. On the other hand, though, I have not spoken with any investors that have used Gogo's service on a private jet like a Textron citation, Embraer Legacy or a Bombardier challenger. So, I was just wondering, how fast and what is the capacity for the Gogo network for private jets? And you discussed how the capacity has increased with the shift of traffic to satellite networks. And so, I'm just wondering, does the private jet network support like multiple Zoom sessions at the same time? Does it support VPN? Any high-level color on the overall quality or service would be helpful. Thanks.

Yeah, I'll start with a funny little story, if you don't mind. Last week, an Embraer employee posted a video on her LinkedIn page showing her video conferencing on the FaceTime, the FaceTime conference with a one of her partners who was flying in an Embraer Prater, I think it was. And they were talking about the meeting he just had. And he was, it was live. It was video back and forth. And somebody piped in on the thread today. So what do you have? What connectivity do you have on that plane? And they said, well, we've got Viasat and we've got L5. And so, Viasat person was watching and they said, oh, great to see the Viasat system working so well. And then another person takes up, which system was running? And they responded, that was L5. So, outside you can have a variety of different experiences with our product, depending on what - which product you have and what plans you buy? Right. So, L5 delivers much more, much faster speeds than the old classic product does. And so, you can run into it. If you got in a plane that was very crowded, and I've been on a plane with like 15 people using the Internet all at once on an old classic product. And you could get timed out and you could have a bad experience. But that was back on a lot of mainline aircraft were still on the network. Now that the network is much better and is relatively empty, we could support three to four times the number of aircraft we have today on today's network. No problem. So, we have a lot of capacity to grow and people with L5 are very, very satisfied. Our NPS scores have gone up steadily and are very strong now over the last four years. And then we're going to further enhance that. So, moving to an L5 have significantly improved the performance. And the decongestion of the network has significantly improved the performance for the classic products already. And but I think our goal is to continue to improve the performance. People's expectations are driven by what they get on the ground. And with the launch of 5G and then there's going to be 6G and everything else, one has to continuously improve what you deliver to the aircraft to try and keep up with those on ground expectations. And that's what we aspire to do.

Awesome, thanks Oak.

Operator. Let's take one more question and then that'll be it.

Your next question is from the line of Phil Cusick with JP Morgan.

Hey, Phil.

Hi, thanks. I'll ask 10 if that's okay, since I'll be left. You've talked about addressing the convert around this time, and it sounds like you expect to buy the first quarter earnings. Can you give us some color on how you think about target leverage at this point?

Barry?

Yeah, so our thinking has evolved regarding the converts, and with the converts being so far into the money now, it's really essentially a decision to make a stock buyback. And so, when we think about the allocation of capital and the opportunities to invest in our business, that pushes us to lean toward being more willing to equitize those converts and of course that would improve the leverage ratio. So, you don't have to kind of see how that plays out, but that would put us kind of out of the gate with leverage ratios, and that kind of six times type range, but with the opportunity to significantly reduce that leverage in the coming years.

So, it sounds like you let the converts be equity in that results in 6 times leverage is not the math that I remember? Sorry, if I'm…

Yeah, there's some ranges in there, but if that were to be the case, that's the general zip code and or lower, depending on how you - what the base is, and what period of time you use as the basis for calculating the leverage. But I think, the main point is a couple of points here is that we want to run the company with a more conservative balance sheet, 0.1, 0.2 is what the cash flow we expect to be able to significantly delever going forward and we plan to do that. And thirdly, is that when you look at the analysis, the dilution from issuing shares to satisfy the convert is more or less offset by the benefits of the lower leverage when you look at the value creation opportunity over time.

Okay.

Yeah. And so, the other way to look at it is, if you sell these things for cash, you're essentially doing a stock buyback. And, I think that's from our perspective probably not as cautious as we'd like to be at the moment. So,

Is there a mix between the two that we should think about or do you think running most of that is the right way to think about it?

Yeah. It's too early to tell on what that would look like and there's certainly some rules you have to follow to be mindful of in terms of how much you can do. But I think, our general pre-disposition is to be able to equitize more of them.

Perfect. And then, is there still a chance for an analyst meeting between now and 1Q earnings? Or is that probably after 1Q?

Probably, after I would think Phil.

Okay.

I think it's late second quarter type timeframe, I think.

That's helpful. To follow-up on a couple of other things, you also you offered a 10% CAGR and revenue from 20 to 25. Do you think you can reliably grow at 10% or better in each of those years as well?

Yeah, I think so, Phil. Yeah. I mean, there might be years it dips a little below, but it's not significant.

Okay. And the last one. Sorry, go ahead.

I was just going to say, it's based in part on coming out of COVID. But when you get into the later years, it really is a result of the market being underpenetrated. So, when you look at the kind of growth rate that we have in mind, still over half of the aircraft at the end of the five-year planning horizon did not have broadband connectivity. So, the market itself provides the background to be able to grow those kinds of rates.

Well, that sort of goes to my last question, which is L3 sales are doing so well. And given the trend and fixed and mobile, I don't see why someday there isn't nearly 100% penetration of broadband on private planes. Do you want to offer an even smaller or less capable product for the smallest aircraft out there?

Yeah. So today, there's two AVANCE and the only real difference is the size of the box and we got one less card and in the L3, I think. So, the L3 is small and that's meant for the light jet market, turboprops. And then L5 is bigger, so we're more easily accommodated in midsize and large aircraft. So, we do have a product that goes down market and we're having a lot of success in the light jet market and we're getting - we don't have a lot of penetration in turboprop, we measured in the 100s today, but its growing and we're getting some traction down there. The turboprop market is a very diverse market. There's a lot of different segments of that market and some of them will may never buy AIFC and the planes will be retired before anybody wants to spend the money on it. But there are also some very attractive parts of that market with newer aircraft that do on IFC. And we're having some success there.

Great, thanks very much, guys.

All right, thanks.

Okay, thank you. That'll be our last question for the day. Thank you, everyone, for joining our call. And we'll talk to you soon. And have a great day.

Thanks all.

Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.