Good day, and thank you for standing by. Welcome to the Second Quarter 2021 Gogo Incorporated 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 speaker today, Will Davis, Vice President of Investor Relations. Thank you and please go ahead.

Thank you Myra, and good morning everyone. Welcome to Gogo's second quarter 2021 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; and 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 August 5, 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'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 has been broadcast on the internet and available on the Investor Relations website 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 thanks all of you for joining us this morning and for your interest in Gogo. Our second quarter results demonstrate strong momentum, as we execute on our pure play business aviation connectivity strategy. Demand for BA in-flight connectivity is accelerating. Our advanced platform is perfectly positioned to take advantage of that acceleration and our vertically integrated business model is converting that demand into sustainable very positive bottom line performance for Gogo. My remarks will focus on first, highlights of our second quarter financial results, including demand metrics for the business aviation connectivity market; second, a discussion of Gogo's merits relative to potential competitors; third, an update on progress against our strategic initiatives; and fourth, I'll discuss our guidance and share some thoughts on how we think investors should look at our equity. Barry will then dive into the numbers and discuss our raise 2021 guidance, give a little preview of 2022, and share our expectations that we will exceed the five-year revenue free cash flow guidance we've previously provided. So let me start with a brief overview of our quarterly results. We delivered strong revenue of $82.4 million, up 16% from pre-COVID Q2 2019, up 51% from Q2 2020, and up 12% sequentially from Q1 2021. We achieved record service revenue driven by significant increases in both ATG aircraft online AOL and average revenue per unit ARPU. On the AOL metric, we cracked the 6,000 aircraft barrier for the first time. And on the ARPU metric we hit $3,195 just $5 short of our all-time high. What's most exciting to us right now though is what's happening with equipment sales driven by the popularity of our AVANCE L5 platform, which is doing a great job meeting the demand of today's connected passenger around streaming, file sharing and…

Thanks Oak and good morning everyone. The dramatic recovery in the business aviation market coupled with accelerating demand for connectivity enabled us to deliver record results for this quarter. The fundamentals underlying these results provide a solid foundation for driving future performance in at least three ways. First, as more aircraft come online this translates into recurring service revenue that comprises approximately 90% of our gross profit and represents the source of our exceptionally high lifetime customer value. Secondly, the increasing demands of today's connected passengers are driving continued ARPU growth as customers more fully leverage the capabilities of our future proof AVANCE platform. And thirdly, the strong demand has resulted in record backlog levels which further derisks our projections. In the second quarter we set new records for both service revenue and adjusted EBITDA. The tremendous year-over-year growth we experienced this quarter is certainly skewed by the comparison to the depths of the pandemic in the second quarter of 2020. But even on a normalized basis, the growth rates are very meaningful. As I walk through our second quarter financial performance in more detail I'll note as we did in our press release this morning comparisons to the second quarter of 2019 which will provide more normalized comparisons. At the end of my remarks, I'll also provide an update on our ongoing Gogo 5G investment as well as some additional context for our long-term outlook and guidance. Gogo generated total revenue of $82.4 million in the second quarter an increase of 51% compared to the second quarter of 2020. Total revenue was up 16% from the pre-COVID second quarter of 2019 and revenue continues to ramp coming out of COVID. Total revenue was up 12% sequentially from the first quarter of 2021 driven by increases in both service and…

Thank you. At this time, we would like to take any questions you might have for us today. [Operator Instructions] We have our first question comes from the line of Scott Searle from ROTH Capital. Your line is open, please go ahead.

Hey good morning. Thanks for taking my questions. Congratulations guys on a great quarter. Difficult operating environment for the rest of the world, but you guys are excelling in terms of what you are posting. Maybe quickly to dive in on the guidance this year from an EBITDA perspective. You've kind of touched on a couple of items where there were some one-time sales contributions related to deferred revenue as well as the ramping 5G cost. But even taking that into account, it seems like the $130 million for the second half of this -- implying that into the second half of this year seems like it's conservative. Is there something else going on there, or are you guys really just taking a conservative view of the world into the second half of this year?

Yes Scott as we said, it's at least $130 million. So, we certainly expect to be above that number. And the primary drivers of this are really kind of three factors to consider. One is the majority is due to 5G that is the majority of the tapering in the second half versus the first half. Secondly is that there are some increases in other expenses like we're planning on sales and marketing that light up the current market environment. So, these increases more than offset the increase in gross margin that we expect to see due to the higher revenues. So, I think we tried to highlight the primary issues. And again we may be being a bit conservative, but -- and again it is at least $130 million.

Got you. Helpful. And if I could as a follow-up looking at the broader macro demand picture it seems like it's exceedingly high. I'm wondering if you could talk a little bit about what you think the overall installation capacity is out there within the marketplace. Is that going to be a limiting factor? Are there some things that you can do on that front? Because that really seems like it could be the one gating factor out there besides component availability as we start to get into 2022 and 2023. And maybe as well if you could. Oak I'd love to hear you touch a little bit on early thoughts the general aviation market, kind of, timing and pricing that you would see going into that and maybe something related to the timing of some of your LEO partnerships? Thanks.

Yes. In terms of capacity it's a great question, Scott. We -- right now, we think that there's ample capacity to hit our projections obviously. But -- we are spending a lot of time actually sort of deep diving on that and trying to figure out okay our market is relatively unpenetrated. Why is that? And what are the inhibitors and how can we break those inhibitors down and accelerate our AVANCE penetration. So that's actually a work in progress for us in terms of, sort of, deep analysis. I would say this we are growing AVANCE very quickly and that we're growing at 50% rate. So that's what's already a fairly large number. There's more AVANCE installations in the world than any other business aviation IFC platform so other than our old ones. But -- so we are growing quickly but we'd like to grow faster. So that's your first question. The second part of your question I know the last part was LEO.

General Aviation…

Yes. Yes. So general aviation, yes, it's a very large market. The question is, what is the revenue opportunity there for us? And we don't have a firm view on that. This is -- it's kind of a learning experience for us. And the deal we have with Cerus is good for us from a financial perspective. We were selling new equipment at our regular price and they're putting it on their jets as ordered by their customers and then they have what I'd call, sort of, a macro service plan they sell to customers that includes a whole bunch of things and now will include connectivity as well. And then they're paying us for the connectivity. So we're very happy with the deal. The question is, are there other parts of the GA market that that might work and we think there may be. But there are clearly out of 200,000 aircraft there are a lot that are -- they're probably not an addressable market for us. So -- we'll give more guidance later as we learn more about this. But the good news is it has opened it up for us and there are clearly pockets where our products will work. And then the last part we are in active conversations in the LEO and ESA world. And I don't think we'll want to get over our skis in terms of giving any guidance on timing of anything. I think the important takeaway is that for these guys feed the revenue is the most important thing. They've got to be able to build business cases that show them getting rapidly to revenue. And when you look at the BA market and if you understand our AVANCE platform, it's no question that we're the fastest way to revenue. So I think that we'll have a good hand to play with the LEO providers and we're going to continue our conversations and see where it leads us.

Thank you. Great quarter.

Thanks, Scott.

Thanks. Scott.

Our next question comes from the line of Lance Vitanza from Cowen. Your line is open. Please go ahead.

Hi, guys. Thanks for taking the questions. Nice growth on the AVANCE unit. Can you break out how many of the L5s you have installed today? And how that compares with three months ago?

Barry, I think, you have those numbers handier than I do.

Yes. So we – sighted some of those. So the total of L5s that we have installed are about 1400 this quarter and L3s are the high 600s. So some of those get over the 2000 number that we had cited. And that's the growth that we talked about at the lower 50% growth over last year and continues to build quarter-to-quarter.

And I think the last time we spoke I think the L5 number was 1,300. So it seems like that continues to improve nicely as well. And then, I guess, Oak no question that the industry is back and we think it's going to be back for a long time. But you made a comment in your prepared remarks about how the return of international travel which has still remained a little bit depressed how that could actually -- I think you said how that could help Gogo, but I'm not sure if I followed that, because given that Gogo is domestic, given that it's underground, could you talk about how the return to international travel could be another tailwind for you, or perhaps I misheard you.

Yes. No, you heard me right. A lot of those aircraft actually have ATG on them and they use ATG till they get outside our coverage range and then they flip to the international, to satellite service. So you talk to the big corporate site departments, almost all of them have ATG and satellite.

Okay, great. And then my last question, I guess, as you mentioned obviously line-fit at all nine OEs, you're well positioned. I think the way you put it was, to get your fair share of new installs. What would you say your fair share is? I mean, presumably, it's something a lot less than the 90% of the installed base that you have today, but how do you think about what that fair share ultimately should look like?

Well, aircraft that are manufactured for international missions, missions that are totally outside the U.S. are obviously not going to be part of our fair share. And that varies year by year, but that's a fairly large portion of what the OEMs produce. So you have to sort of focus on those that have either primarily or totally North American missions, in the light and medium sized jets today that were probably honestly the only option. And so that's -- our fair share is very high. And then in the heavy jets, most U.S.-based heavy jets, not all, but most will add an ATG system to their satellite system. So we get a fair number of those as well.

Great. Thanks, guys. Appreciate the questions.

Our next question comes from the line of Ric Prentiss from Raymond James. Your line is open. Please, go ahead.

Thanks. Good morning, guys.

Good morning, Ric.

Hey, Ric.

A couple of questions. Yeah. Going well. A couple of questions. Obviously, pretty innovative on the supply chain management, which has been some issues out there obviously. Any problems on the cost side? You guys said you mentioned funding them, maybe ordering inventory early, but should there be any margin pressure from the supply chain issue in the short or medium term?

We haven't...

Yeah.

Go ahead, Oak.

Go ahead, Barry. No, you go.

We haven't seen real pricing pressure. We are continuing really to look at now 2022 to drive the kind of changes that are going to be necessary to meet that increasing demand. So we're doing some other kind of creative things. For example, we're providing our contract manufacturers with components to build our equipment that they can't secure on the open market. We're also putting 12 to 18-month demand on our supply chain. It allows us to identify and address critical shortages well ahead of time. So we're really trying to get out ahead of it and managing the whole supply chain and the internal ERP system to levels that accommodate the higher demand that we're seeing. So we have done some prepayments, as I mentioned, in very selective areas. Those are individually negotiated with the suppliers on the people that can benefit from that. In that case, those are quick protocol arrangements where we get something for doing that as well. So it's been a very, very active process, kind of, component-by-component or vendor-by-vendor. And so far so good for this year, but we're really trying to shorten the lead time quotes for next year, because we're getting pressure from customers that they would certainly like to be able to have the installations happening more quickly and we'd love to have that happen as well.

Makes sense. Doing some innovative stuff there. Second, to continue along the lines Scott asked on the LEO side, a couple of the gating factors could also be the STCs. Update us as far as when you think you need to work on some STCs? And also, what is the status of ESAs out there that you're seeing?

Well, the status -- I'd say it's about two years. So there is a viable ESA for the business jet market. So -- and that's across a couple of different suppliers. I think that are fairly far along in developing these technologies. In terms of the FTC, until you have the antenna design and ready to go and you have a PMA from the FAA you can't go get FTC. So that would be a ways out.

Right. So as far as thinking of revenue opportunities, having discussions with LEOs is good. But as far as the revenue opportunities, we need the ESAs and then the STCs kind of time lining it?

Yes. Yes. We don't look at this opportunity as something that is short term in terms of being able to drive revenue, Ric. I mean I think you're talking three, four, five years out. And we'll give more guidance on time lines as we form partnerships and have more concrete time lines.

And final one for me is with streaming services significant consumption of data you talked about how your 4G network got extra capacity with the mainline stuff coming off. But how should we think about any congestion sites out there. People obviously are consuming as much day as they can. As you design the 5G network, how should we think about how you manage congestion within the network?

Yes. It's a key focus of our engineers. And it's all about network design and how you aim antennas, and where you put them, et cetera. So yes, there's a whole very complex science around that. And I'm probably the least qualified person at Gogo to give you any detail around it, but it's a significant consideration and we plan hard for it and we build around it.

And as you think about what kind of build capacity you're building into this, what kind of annual growth in consumption are you assuming?

Yes, look, our growth consumption grows about 25% a year and that's what we use for our projections going on out, but right now we have a lot of excess capacity. And we figure that today's network we could handle three times as many jets as we have on aircraft, I should say, as we have on the network now for several years out including that growth. So we are not constrained in terms of our network, in terms of the number of aircraft we can handle. And with 5G, of course, we'll be able to significantly improve the speeds we deliver to them to those aircraft.

Appreciate it guys. Stay well.

All right. Thanks, Ric.

Thanks, Ric.

Thanks, Ric.

Our next question comes from the line of Phil Cusick from JPMorgan. Your line is open. Please go ahead.

This is me [indiscernible] for Phil Cusick. Thank you for the time. First off, what is Gogo hearing about SmartSky from its sales channels and installed partners? And second with the 5G build obstacles might there be to that second half of 2022? And could you go into why the $5 million of CapEx was shifted from 2021 to 2022? Thank you.

Yes. I'll start with the SmartSky and I'll turn it over to Barry for the 5G. The dealers and MRI stop taking SmartSky seriously a long time ago, because they missed so many dates that they promised in terms of delivering the network that it's just not worth taking them seriously. So that's number one. Number two, the dealers do not like the antenna and they nickname the canoe, because it's so big. Now there's benefits in a large antenna, which is you get more power out of it and better signal, but the problem is in business aviation one has to be very careful about how one balances size and power. The way we've done it is we've got very large ground-based antenna. So we get the power out of our very large arrays for 5G and we minimized the size of the antenna on the aircraft. And that's really driven by what the market told us about antennas and what they're willing to put on an aircraft and what they're not. So I think SmartSky got real challenges in the dealer network. I mean, the former CEO Mark comes out of Dunkin' Aviation, so he does know people in the industry obviously, and they've been trying to form partnerships and they boast of a lot of partnerships, but when we talk to those same people we don't find much substance there.

And then Amir [ph] on your question about the $5 million change in the program spend. So it's only on a $5 million CapEx push. It's the overall spend. And the result of that is -- some of that is shifting between OpEx and CapEx those things get kind of tweaked as you go through the process based on accounting standards and so on. So really what's happening is that we're matching the spend with the program planning as it evolves. So it is shifting into early next year. So it's really pretty modest changes within the program as we said on the stem side. And as we said, this is not affecting the delivery date, which is still in the second half of next year. So we have continued to modify -- continue to refine the program in response to kind of what we're seeing in the market. And it's really that development, but it has to do with flight testing and those kinds of things and just the timing of that.

Great. Thank you.

Thank you. Hey. Operator, let's take one more question please.

Sure. Our next question comes from the line of Louie DiPalma from William Blair. Your line is open. Please go ahead.

Oakleigh and Barry. Good morning.

Good morning, Louie.

Good morning, Louie.

The topic of competition seems to be the overarching driver of the stock price recently. During the quarter, Gulfstream announced that it reached a milestone of 500 Inmarsat aircraft online. Inmarsat seems to be doing well in this business jet WiFi market. ViaSat also announced the win with Flexjet, Satcom Direct appears to be doing well. And all this took place and you were able to achieve robust revenue growth of 70% and even with several other vendors doing well. And so my question is, do you think that the business jet market for in-flight WiFi is large enough to support multiple vendors? And do you need to maintain 90% market share or 80% market share to grow in a double-digit range or a high single-digit range?

Let me jump on that Louie. So first of all, the Gulfstream announcement by Inmarsat been using -- we actually have 1016 Gulfstreams with our equipment on them. So about double in Inmarsat. The -- we actually kind of cohabitate with Inmarsat. I don't view them as a direct competitor. And you'll find that most jets that are US-based that have Inmarsat system will also have a Gogo system. At that end of the market, Redundancy is important and they also like the quality of the ATG network went over to North America and the fact that it's cheaper than using the satellite product rather over the US. So we really cohabitate there. I'd say ViaSat is kind of lost right now. I mean, they don't have a global product yet. They presumably will when ViaSat-3 gets launched and then they will compete with Inmarsat. I mean, they have what I'll call sort of the super regional product is with their ViaSat-2 product. And it's -- it can come down market a little bit from where Inmarsat is into the super mids and that's what that FlexJet deal was. But they really don't compete head-to-head with us. And I think they're sort of trying to, but they don't really have the right product to do it. It's a lot easier and cheaper to install us than ViaSat. And frankly the service from L5 is comparable to what ViaSat is delivering. So people don't have a real incentive to -- they're certainly not going to switch and it's only on a new aircraft or where we would compete head-to-head. Satcom Direct is really a reseller of other satellite companies products. So they're very good service organizations and we have a lot of respect for them. But again, they're sort of at the high-end of the market. And again, we would co-habitate sometimes with satellite direct installs. So again, it's kind of the same as the story for Inmarsat if you will. So that's the competitive environment with SmartSky launches obviously they will be a competitor. I think I talked a fair amount in script about some of the issues I think they're going to face. Did you have any other more did that cover what you wanted to cover Louie, or do you have some other stuff?

Like related to what Lance was asking in terms of almost what percentage of new aircraft that come online are equipped from Gogo? And right now, that number is probably very high. But if in the future for new aircraft if instead of having a 90% market share of new aircraft, if you have a 60% market share of new aircraft that come online, is that enough to continue supporting a 10% revenue growth?

So first of all, we don't have nearly 90% of all the aircraft that come out of the OEMs because almost a very high percentage go overseas and they wouldn't put Gogo on them I think 30%, 40% go overseas. So they're not going to have Gogo. And then there are different ways line-fit works. I mean, sometimes you're an option, sometimes you're standard. On the large – on the very large heavy jets, we're not – we're going to be an option. We're not going to be standard. And then on the light and medium-sized jets, we will typically more often be the standard offering. So – but Inmarsat JX is going to be the standard offering on the large Gulfstream for instance, if not us. So today we – that's why I say our fair share. I don't know, exactly the numbers, it kind of varies, but we get maybe 40-ish percent of the planes coming off the line in total something like that, would have our systems installed. So we actually have room to grow there. We – I'm not that worried about shrinking. The other part of your question, sorry. Let me ask this. The other part of the question you need 90% market share, generally to continue growing at 10%. And the answer there is, no. The math is obvious because there's so much unpenetrated room in the market for us to grow that others can come in and grow as well, and we could still easily maintain our 10% growth rate. Remember, the end of our five-year planning model, which we shared in our year-end call, we projected a 10%-plus growth rate through the five-year plan. But at the end of that planning period more than 50% of the jets in the world still didn't have connectivity. So there's still a lot of market left to get.

Right. And I think that, last comment you said is like particularly relevant and that's what answers my question, because during the quarter, I think ViaSat announced that win with FlexJet and your stock went down by 10%, when it seems that ViaSat is able to win like several aircraft in the quarter and Inmarsat and others can win aircraft, but that didn't impact you, because the market seems to be very underpenetrated. And that's basically what I'm asking what you think these other vendors are able to still win?

Yeah. I mean, really in that case those Flexjet plans were not in our addressable market, because they fly to Europe. That was the whole reason they used to that's an edge case where ViaSat has an advantage. So those had to go to Inmarsat or ViaSat basically. And so really not a loss on our part and wasn't a business we were competing for.

Thanks, Oakleigh. Thanks, Barry.

Yeah.

Yeah. Thanks, Louie.

Okay. That was our last question. This concludes our call. Thank you for joining our second quarter call. Operator, you can end the conference please.

Thank you, everybody.

Thanks all. Appreciate it.

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