Good day, and thank you for standing by. Welcome to the Gogo First Quarter 2021 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. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. William Davis, Vice President of Investor Relations. Please go ahead, sir.

Thank you, RJ, and good morning everyone. Welcome to Gogo's first quarter 2021 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 May 6, 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 first 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’ll 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 thank you all for joining us this morning and for your interest in Gogo. The first quarter results we announced today and the completion of our refinancing last week, besides Gogo strong momentum as we execute on our pure-play business aviation connectivity strategy. Today, my remarks will focus on highlights of our first quarter results, business aviation's strong recovery from the depth of COVID, our progress against the strategic initiatives I discussed on our last call and the impact of the refinancing on our business on a go-forward basis. So, let me start with results. Gogo delivered a really strong first quarter, driven by the ongoing recovery of the business aviation market and the strength of our advanced platform. We generated total Q1 revenue of $73.9 million, up 4% compared to Q1 2020, driven by a 3% increase in service revenue, and a 10% increase in equipment revenue. The service revenue growth is primarily attributable to 3% increase in ATG aircraft online, hitting a new record high of 5,892 aircraft. Our ability to rebound from the depths of the pandemic to record aircraft online in just 12 months, speaks to the resilience of our team, the strength of our technology, and the mission critical nature of our service to our customers. On the equipment side, Gogo grew first quarter revenue 10% year-over-year, driven primarily by AVANCE L5 sales and supported by some lifetime buyers, who are already in equipment. We also mark an important milestone, 100% of Gogo’s ATG equipment shipments in the first quarter or AVANCE. And as we wind down new sales of our classic ATG product line and customers gravitate to our next generation AVANCE platform. Despite the strong year-over-year growth, equipment revenue was down 30% sequentially from an extremely strong Q4 of 2020.…

Thanks, Oak, and good morning, everyone. In my remarks today, I'll start by walking through Gogo's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet, following our comprehensive refinancing last week, which is a major milestone for Gogo, and sets us up for significant value creation going forward. And finally, I'll finish up with some additional context around the updated 2021 guidance and long term targets we announced this morning. As Oak mentioned, the accelerating recovery in the business aviation market and our unique ability to capture that value drove strong first quarter results. Total revenue of $73.9 million increased 4% compared to the first quarter of 2020, driven by increases in both service and equipment revenue. These results reflect the continued recovery in the business aviation industry, and strong sales of Gogo’s AVANCE platform. On a sequential basis, total revenue decreased 4.8% in the first quarter of this year. We had strong growth in service revenue sequentially. However, as expected, equipment revenue declined following the record AVANCE shipments in the fourth quarter of 2020, driven by pent up demand promotional activity and general seasonality for equipment. Let me break down the revenue progression between service and equipment. We achieved record service revenue of $59.4 million this quarter, an increase have nearly 3% compared to the prior year period, due primarily to a 3% increase in ATG aircraft online and recognition of $1.2 million in service revenue, under the network sharing agreement within Intelsat. As a reminder, we have a 10 year deal, under which, Intelsat has exclusive rights to our ATG network for Commercial Aviation, subject to paying us at least $178 million in revenue share over the term. We expect to generate increased revenue, under this Agreement overtime. On a sequential…

[Operator Instruction] Your first question comes from the line of Ric Prentiss from Raymond James. Your line is open.

Thanks. Good morning, everyone.

Good morning, Ric.

Morning, you guys have been busy.

We try.

We will start the conversation on competition, you mentioned a little bit about AVANCE conditions you in case you make a decision on LEO, but we get a lot of questions about competitive dynamics, obviously, there's other air to ground potential networks out there. There's LEO, ViaSat, talks a little bit about what they're doing business aviation, but talk a little bit about how you see the competitive dynamics and your ability to continue to grow share?

Yeah. Well, we look at growing units, not necessarily share anyhow. So we don't focus so much on share. But yeah, we look -- there are three general segments of competitors or complements depending on how you want to look at them. LEO's we actually view it as more of an opportunity than a threat. The three LEO networks that are in process right now, and probably more to come after that we obviously have Starlink, Telesat, OneWeb, and at least Telesat and OneWeb have telegraph pretty clearly that they're going to move in a B2B manner into our segment. And I think we view that is not going to get partner with either of them in order to add, LEO is a feature of our offering. And frankly, we think that's a pretty big threat to our geo competitors. So either Starlink chooses to go with a B2B model or not, I don't know. But this is a pretty small market, if you think about our whole industry is about $500 million industry on the service side. And they've got much bigger industries to attack and frankly, bigger markets to attack. And then when you think about the investment of having to go deal with nine OEMs build a dealer network of hundreds of dealers, deal with a highly fragmented market in terms of sales to the end users, fragmented market when it comes to the number of planes and models that you have to get at DCs for. I'm just not sure that Starlink is really going to view this as something they want to go after. I think the Starlink has aspirations in the in the larger Aero markets and commercial aviation and in mil Gov. And again, that -- those are aimed at larger aircraft. And…

That's LEO. On the GEO front, the big weakness is latency. And I think over time, as LEO has come along with much lower latency. The weaknesses of the high latency solutions like GEO will become more apparent to end users. When we were in the commercial airline business, we did a lot of work with an airline in particular, understanding the impact of latency, and we were looking at future applications that people would be using in aircraft and setting parameters around customer satisfaction. And about half of the used cases we came up with could not be served with GEO satellite connectivity. So both our competitors and the satellite, the GEO competitors have long-term committed plans to launch more GEO satellites. And it's going to be very hard for them to pivot the LEO satellites anytime soon. So we actually view that as a weakness. Those guys, obviously, the GEOs are much more expensive to install than we are, which is a major inhibitor. And frankly, just given them relative uncertainty of our equipment compared to theirs. That will always be that they are far more expensive than we are. There service plans tend to be a lot more expensive. Viasat has been discounting to some extent and trying to come down to what they call ATG prices. However, when you look at their plans, there are a lot of limitations. That kind of, I would say, undercut but they're actually saying publicly. So they're stuck still on the large end of the market, the equipments are heavy and it's large. Viasat is a little smaller than Inmarsat. So, they've been able to come into the super midsize jets. But that's about it. And so -- and we compete very effectively with those guys in the high end,…

It does. Very thoughtful answer, Appreciate that. Obviously, you guys spend a lot of time looking at the competitive environment. Follow-up question is, you've mentioned strategic projects, strategic possibilities in the future then expand overseas, is that what we should think of is where some of the future might be for Gogo and don’t you face some of those same issues as far as how do you then develop a dealer network and sales and opportunities overseas? If I'm hearing you, right, that that might be an opportunity strategically?

Yes. Well, we actually already have sales and support overseas because of our old narrowband products. We sell radium, and we sell SwiftBroadband globally. So we have a network already, we would need to expand that somewhat. But that's an incremental investment we could make without too much cost. We also -- the way we would probably go at this, and let me back up for one second, we have not committed yet, our Board is not formally approved yet, us going after the ESA LEO project or some other options we see on the table. But the point we've been making, it's an advanced gives us the opportunity to go after those, the option I should say, of going after those opportunities if we want to. And that's really powerful. I think that as we look overseas, you're going to start, obviously, with large jets within the ESA LEO kind of apparatus. But once you're there, you can go after the medium sized jets, and light jets, because the ESA form factor should be smaller, and gives you the ability to go after those guys. We’re particularly good at engineering for small aircraft, that's one of our very core competencies. And so we think there's the opportunity with LEOs to go down market overseas in that market of 14,000 aircraft, which you really can't do with a GEO satellite solution. So that would be the TAC

Okay. Makes sense. I think brochure on I suppose really getting at is in other places that don't have connectivity.

Yes. It's the issue overseas is pretty simple. This is just not economic really in most regions to build an ATG network, because outside the US is a large geographical area obviously. And it's 20% to 30% of the world's flight, whereas the rest are in the US. So there's very low flight density. So the CapEx involved in creating ATG networks is pretty insurmountable. You do have an ATG network in Europe, of course, whether it's is some density, but all of Europe, in total, it's still only 6.5% of all the business aircraft in the world, so not a very big market. So, satellite is really going to have to be the solution to the rest of the world.

Great. Thanks guys. Stay well.

Thank you.

Our next question comes from line of Phil Cusick from JPMorgan. Your line is open.

Hey, Phil.

Hi, guys. Thank you. I heard the milestones in 5G, that's great. What hurdles remain in getting that up and running?

We need this current 5G chip production to stay on track. And assuming that happens, then all the technology risk is removed, and it's really a function of blocking and tackling. And we -- on integration testing and the like, basically everything else is in our control, let me put it that way. So we have a great program management organization at Gogo, enabling an excellent job on managing this risk. And reorganizing the project in order to still hit our deadlines, and we feel very good about that. So we're on track for 2022 as we said, and when it comes to blocking and tackling, we are really good at it. This would be our fourth ATG network, really, we built the first ATG network, then we built ATG four. And you have to remember that we were on the verge of launching our first significant upgrade of our ATG system. But unfortunately, we had a Chinese partner on back in 2018 when I joined the company and that was almost complete, and that wasn't working very well. So we did that. And now we've got this. So our team is really good at this, and they understand how to do it, and we're very confident in our ability to deliver.

Okay. And you talked about 28% penetration, and we get into this a little bit with a record, but do you think that the L3 price points are enough to cover the gamut of planes out there? How high can penetration get from 28% given the price points you have today?

I think it's hard to imagine for me 10 years from now that there's a plane without connectivity, so that's how we look at it. There are markets, like general aviation, which is not accounted, not in that 28% share total addressable market. But there are markets like general aviation, and the general turboprop market. When you look at them, you say, okay, I understand that that is certain, turboprop that are not trotters, they aren't that profitable or whatever, they are not addressable today. But I think that ultimately, they are addressable. So we believe all planes will be connected in 10 years time, and yes, there may be lower price points to get you there. But L3 is pretty cheap. It's around $30,000 at an entry point, you can buy -- pay as you go plan, if you don't fly that much, you don't pay anything, you can buy at pretty low costs, what we call core plans, and then you can upgrade over time, you can upgrade the equipment fairly easily. The three stages of L3 is core, and then there's two more enhanced stages after that. So you can come in pretty cheap and grow, and we're getting a lot -- we're getting some success in the right end of the market, no question and in the turboprop market. So we think we're -- we've got some good openings there. And, yes, we'll keep learning and figuring out better ways to trade more of those markets. But so far, we're making some pretty good progress.

Okay. And last one, any anything you can give us on the status of conversations with the remaining convert holders? Thanks.

That's really a Barry question, but I'll answer it because it's a really easy question financially. And I am -- without talking to them right now, there's not that much incentive for us at this point to convert them, will convert them at maturity. Or it is -- they can make a compelling economic case to us to convert them as well.

I think that's right.

Thanks.

The data piece, the reason we did it previously was we wanted to get them converted, because it really enhanced the financing. We did help the system getting an upgrade, for example. But now as Oak mentioned that incentive is no longer there in the same way that was before.

Thanks, Barry.

Your next question comes from the line Scott Searle from ROTH Capital. Your line is open.

Hi, Scott.

Thanks for taking my questions. Hi, Oak. Hi, Barry. Congratulations on all the work you've done in the past year. It's nice to see you guys becoming a real company. So Barry, just real quickly, I'm not sure I missed the number, but did you give a number for Intelsat contribution in the first quarter? And I just want to clarify on the component availability, it sounds like you guys have sufficient inventory to carry you through this year? Just want to confirm on that front. And then as it relates to 5G and the 5G upgrade, I'm wondering what the cost is Oak in terms of moving the AVANCE, existing AVANCE installed base and upgrading that to a 5G solution. And as you look at now, it sounds like there is an uptick in terms of new jet orders. I think you said 6% this year and next year, what do you think the attach rate for that is in terms of connectivity and particularly on the turboprop market, which has been an underpenetrated area? I mean, how deeply penetrated do you think that can be over the next three years to five years?

So that…

Let me start take your first one on Intelsat, Scott, which is a stake problem. And so it was about $1.2 million for the first quarter. And as the minimum amounts start relatively modestly and then grow from there. And it did, as we talked about how some impact on the -- on the service margin. It makes a couple of points difference in service margin because of the geographic shift on the financial statements from being a contra cost of service to revenue. Oak, why don’t you take the other question?

Yes. The analyst projection is a well-known investment bank who's got somebody on this call and has a very good business aviation analyst. And they've raised projections of 6%. I've delivered this year and 6% next year. So that -- a lot of those units will be installed with IFC, it might not always be Gogo, some of those would be larger jets that that might only have a satellite solution in them. So I don't -- I can't give you an exact number on what we think we would get out of those 6% today, but we can get dive deeper into their numbers and give you some projections if you'd like. Turboprops -- a lot of the turboprops coming out today do come with IFC. That there's not a lot of new turboprop delivery. But most of them would have some IFC in them.

Got you.

What was the other….

I am sorry. Component – component availability, in terms of your comfort level?

Yes, we have pretty good line of sight through the next couple quarters being able to fulfill our demand. And, you know, we're still working on securing, making sure we have supply secured after that. But you know, the benefit of being – of our sourcing strategy and our common componentry is that a, we don't have to secure that many different SKUs, which is good, makes it a lot simpler and b, for each SKU, we order a lot more of them. So we have a more of a – more important to our suppliers. So that gives us a fair amount of leverage in terms of trying to get to the front of the list when it comes to getting supply. So our team is working extremely actively, and if they have, you know, very good tracking, and all this kind of stuff. So we don't take all of that inventory is that we build up our inventory – our working capital needs a lot, but we secure it any – we secure it and as far as, how far out we're good, we're good out a couple quarters and trying to finish that up to the end of the year. So we’re feeling pretty good about it.

Got it. And lastly if I could Oak, you answered a lot on the competitive landscape but SmartSky certainly made a lot of headlines talking about the – their IP and intellectual property position. I'm wondering if you could just quickly address are there any concerns that you have related to your ISP solution and its ability to operate in a 5G environment and or otherwise, that has any concern for you as it relates to the patent position? Thank you.

We're not, yeah, we're not concerned. I mean, we study every one of their patents in a lot of detail, make sure we understand them. And we don't believe that they have any valid patent that we could be founded infringing upon. Now, they do have patents that we don't think are valid, because they have ignored prior art. But that's a different, you know, that's a different issue. So, you know, we have more patents than they do, if you want to, you know, who's got the biggest patent list? We do. We have 349. They – we've been in this business a very, very long time. And we've been thinking about a lot of different ways to do ATG for a very, very long time. And, you know, there's nothing they're doing that we haven't already thought about, and I'll put it that way. And, you know, the thing that SmartSky did that was, you know, smart early on, and we did it also was figure out how to access unlicensed spectrum. And, you know, they had this sort of regulatory loophole, I'll call it that, that allows us to use regular, unlicensed spectrum and we can do the same thing. If you can't patent regulatory loopholes. That's about the most original thing they've done. So back to the patent site, they're not concerned, you know, they may find that the only way that they can, you know, convince investors that they have something that's monetizable is to sue us over intellectual property. I bet I think that would be a mistake on their part.

Great, thanks so much. Congrats on the quarter.

Thank you.

Your next question comes from the line of Simon Flannery from Morgan Stanley. Your line is open.

Great. Thank you very much. Thanks for all the guidance. On ARPU, you've talked about the number of planes growing 400 a year and the opportunity to get into some of the smaller planes that we're talking about. So how does that may influence your thinking on what happens to ARPA, you've got the data growth. You continuing – you've got some of these new unlimited plans, but what are all the puts and takes on that over time? And then thanks for the free cash flow guidance, how do you think about, what you will spend that 100 million plus on over the next few years, balancing between paying down more debt, strategic investments, M&A, return of capital? What are the priorities as you get into 2023 and beyond?

Yeah. Simon. I'm happy to take those on ARPU you asked about the puts and takes. There are several drivers there. Couple of that will push that up overtime and one that may reduce it over-time. So first, people tend to move toward more unlimited plans. So we have seen that progression overtime. They want to have predictability in their bills. They want to have access to the pool of services. So that's one thing that going to lift. But the second one overtime is clearly 5G, because of the enhanced performance of 5G. We're very confident. We'll be able to price that at higher levels, reflecting that value. So that would lift up overtime as 5G network is deployed. On the downside, as we get into smaller aircraft, they tend to spend less, as you'd expect on a monthly basis. And -- but having said that, the price per megabyte is still attractive. And that's a very under penetrated market. So that presents a really attractive market for us. So it makes sense to continue to go after that market. But we do expect ARPU its raise overtime, particularly as you look at the deployment of 5G. On the uses of cash, $100 million of free cash flow, your first priority is to continue to deliver. So we've made a major step forward on that with the sale of CA. and then using that those proceeds to paydown debt, we still want to continue to deliver. And then, out overtime here, we'll have to evaluate that, when we get through the full deployment of 5G and for -- as we are generating cash, we'll see what those priorities are. But it puts us in a great position to be able to even frankly, think about those decisions at this point.

And what is that amnestied target leverage do you think?

Yeah, we haven't really set that. But, we will -- we look at that, as we continue to unfold the business. And as I said, get on the other side of the 5G deployment. But we'll take careful look at that, how to balance leverage against shareholder returns and come out with something probably more specific as that unfolds overtime. But right now, we haven't set up there's no decision to make at the moment.

Great. Thank you.

Hi, Simon, I just don't see a need to lock ourselves into something when we don't know what conditions will be 18 months from now, let's wait and see. In terms of the investments, the opportunities that we sort of have on the drawing board are much lower investments than 5G. So I don't want people to think that we're looking at those kinds of heavy lifts again. And, our requirements for those that they give us significant competitive advantages, and they have a very high return on invested capital. So, if we're going to have a pretty high bar on investments.

Thank you.

And Simon, I would just add one piece of the art good question too is, as we talk about revenue growth annually, at least 10%. And that split between digital planes coming online, round numbers, about 8% of planes coming online, additional aircraft online and about 3%, ARPU growth overtime. So that's basically the mix. And, historically, those two things are obviously been the drivers of improved revenue overtime also.

And does that fair again on the ARPU, or does that more as the 5G kicks in?

Yeah, it does step up when 5G kicks in, because – that is a really a step function in the increase in ARPU. If you look at it on a compound basis, it's the 3% number.

And Simon just to make it really clear, yeah, we will have more customers with lower ARPU than the average and we're going to have more people above. But it's all going to drive growth for us and is very clear points out on a megabit per megabyte basis is going to be very profitable. So that's why the, you know, the overall ARPU number only goes up at 3%. But, you know, you've got growth at both ends of the curve so.

Thanks, Simon.

Thank you.

[Operator Instructions] Your next question comes from the line of Louie DiPalma from William Blair. Your line is open.

Great. Barry, Oakleigh, can you hear me?

Yes.

Hey, Louie, how are you?

Great. I just want one quick one since already 837. But in terms of your future plane growth, how much of your growth is expected to come from retrofits versus lineset? And related to this over the past year, do you have an estimate for how many of your ATG system shipments were to the OEM channel versus the aftermarket? Either channel. Thanks.

Generally, speaking, it's about 60% aftermarket 40% OEM. Barry, you have it for the most recent quarter and year – so after market recently.

Yeah. So if you look at it, historically, and kind of go forward basis, really, the OEMs as a percentage of ATG, equipment revenue in the fourth quarter it was – I would say, skewed more of the 20%, 25% range for OEM. In the first quarter, it was about 40%, OEM. And you guys, we'd look at it on a go forward basis the OEM percentage we expect to be in that kind of 30% to 40% range.

Awesome. Sounds good. That's it for me. Thanks.

There are no further questions over the phone line at this time. Presenters, you may continue.

Well, okay, this will conclude our call for today. Thank you everyone for your participation bye-bye.

Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.