Good morning, ladies and gentlemen, and welcome to the Q4 2021 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Jerome, and good morning, everyone. Welcome to Gogo's fourth 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 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 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 3, 2022. 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 fourth quarter earnings release. This call has been broadcast on the Internet and available on the Investor Relations Web site at ir.gogoair.com. The earnings press release is also available on the Web site. 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.

Thank you, Will, and thanks for joining us this morning. As we highlighted in our press release, Gogo's 2021 fourth quarter marked an outstanding end to a transformative year for our company, our first full-year as a pure-play business aviation connectivity leader. I'm incredibly proud of all that our team has accomplished and how well-positioned we are to create substantial value in the future. Let me start with a little highlight [of our] [Ph] key '21 achievements that reflect our relentless focus and determination of our world-class Gogo team. Together, we met an enhanced surge in demand for BA connectivity equipment and data. In the midst of a global supply chain crisis, we scaled AVANCE shipments by 40%, and we successfully introduced business aviation's first unlimited data and streaming plans. We have historic financial inflection points, turning in positive quarterly net income and earnings per share for the first time in Q3, and positive free cash flow for the full-year of 2021. We completed a comprehensive refinancing that reduced our annualized interest expense by more than $70 million, giving us the financial strength to invest in approving our products and services to further de-lever our balance sheet, to secure components in a supply-constraint world, and to return capital to shareholders when appropriate. We entered the exciting 200,000 aircraft strong general aviation market, while there's serious partnership offering Gogo IFC on the G2+ Vision Jet. We are gaining traction in the underpenetrated light jet and turboprop markets. As evidenced by our recent announcement with the Pilatus fractional operator, PlaneSense, is installing our AVANCE L3 on their entire fleet of 46 PC-12s and PC-24s. We executed extremely well in our Gogo 5G project, including most recently completing a test that sets Gogo up for an on-time/on-budget commercial launch in the second-half of…

Thanks, Oak, and good morning everyone. We are pleased to have capped off a very strong 2021 by continuing to set new records in the fourth quarter. Our 2022 financial guidance and the increased long-term targets we announced this morning underscore our confidence in the significant value creation opportunity ahead. Before we talk about our expectations in more detail, I'll walk through our fourth quarter results, starting with the top line. Total revenue for the fourth quarter was $92.3 million, increasing 19% year-over-year, and 6% sequentially, deal by strong growth in those service and equipment revenue as demand continue to exceed our expectations. Gogo's top line growth is a reflection of the accelerating strength of the business aviation market and Gogo's unique ability to capitalize on that growing demand. A record service of $69.3 million in the fourth quarter represents an increase of 22% year-over-year, driven mainly by more AVANCE units coming online and stronger ARPU. On a sequential basis, our fourth quarter service revenue grew 5%. ATG aircraft online reached record levels of 6,400, up 11% compared to the fourth quarter of last year, and 4% sequentially. As Oak highlighted, AOL growth accompanied by our subscription based service revenue is the biggest driver of our long-term value creation, as we are fortunate to operate in an underpenetrated BA market with significant headroom for continued growth. New customer activations represented 66% or our total activations during the quarter, the strongest ratio in two years. As further demonstration of the strength of the demand for connectivity, data usage continues to grow along with aircraft online, growing 78% in the fourth quarter of 2021, over the pre-pandemic levels in the fourth quarter of 2019. ARPU grew to $3,301, representing an increase of 8% year-over-year, and 1% sequentially. As Oak mentioned, demand for…

[Operator Instructions] Your first question comes from the line of Phil Cusick with J.P. Morgan. Your line is open. You may now ask your question.

Hi. This is [Amir] [Ph] for Phil. Any update on supply chain for getting the ATB unit this year? And at what level of growth might you hit some issue? And then, beyond that, so the expected revenue growth for 2022, can you breakout your expectations for equipment versus service revenue growth?

Well, I'll take the supply chain piece, and Barry can take the breakout on growth. You know, managing supply chain is very tricky these days, as I'm sure you are aware, and we have secured supply with guarantees et cetera to meet -- our equipment budget and the 25% unit growth that we forecast. We are very busy trying to secure more supply. And I think we have made substantial progress on that. We have two tiers. We have -- Well, I'll say an increase in demand that we see out there that we like to meet, which is one level target, and I think we are getting great folks being able to say that we have nailed that down, probably have more guidance on that later in the year. And then we have more of a stretched goal for the second-half that we are still working hard on trying to secure. So, it's challenging world, but our balance sheet is helping us out, and that we can come in and prepay where we need to. Also I would say that our common [componentry] [Ph] strategy where L3, L5, and future foreign factors use the same components. So, they're using in different mixes and different configurations, but they're the same components. So, that gives us the ability to have more bigger orders, and have more sway with our suppliers. So, both of those things are helping us out right now, and we are optimistic that we're not to the point where we're going to be raising equipment guidance.

And Amir, on your question about the breakout, we aren't providing details on them, I would just say that we are -- as you see of course said the expectations for 15% CAGR over the full timing horizon, and based on that guidance we are moving to revenue in 2022. You can see that we're expecting it get out of the gate strongly in that area. So, again, we expect that strong growth in both service revenue equipments with -- We expect probably in percentage terms equipment revenue to growing a little bit more strongly in terms of the higher rate than service revenue because of the demand that we are seeing.

Thank you, guys. And one more if I may, on the CapEx spend in 2022, I assume you'll be thinking about the cadence of that and some of that CapEx for 5G rollover into 2023? Thank you.

Yes. So, the CapEx spend as you know, is largely is tied to the [tower] [Ph] bills in 2022. So, that CapEx spend is going to be primarily over the first three quarters. That will be spread throughout the year. So, it will be loaded in that. First three quarter time period will be our expectation. There will be some CapEx for 5G continuing into 2023, but 90% of the CapEx spend will be completed by the end of 2022, is our expectation.

Thank you, guys. Congrats on the quarter.

Thanks, Amir.

Thanks, Amir.

Thank you.

Your next question comes from the line of Scott Searle with ROTH Capital. Your line is open. You may now ask your question.

Hey, good morning. Thanks for taking my questions; nice job on the quarter, guys. Hey, maybe just quickly to jump in into the service provider revenue and guidance for 2022, I'm wondering how you are seeing ARPU's trend, given the uptake of allowance, given the pending 3G, [I assume] [Ph] your 5G launch. And also, starting to see GA contribution, which I assume comes in at lower ARPUs. And then I had a follow-up.

Yes, Scott, I think we have guided to sort of 3%-4% ARPU growth over time in the five-year guidance. And we kind of blew that away this year, because we had a lot of upward pressure on ARPU from our unlimited streaming and data plan. I think we still continue to see ARPU, and Barry can give you the exact number, but in the 3%-4% growth range for the five-year model, and I think that's kind of what we would guide to this year.

Got you.

Scott, over time basically 13% is driven by AOL growth, and 3% is ARPU growth, you know, arising from 21 to 26.

Very helpful. And then -- [multiple speakers]…

Scott, sorry, like you pointed out, I mean we got upward pressure, you know, at the high-end of the market once we have begun limited plans, and then as we make more progress in the general aviation market, and then you know, the light jet market, those people tend to buy lower rate. So, there is downward pressure as well. But that's all good for us. I mean that's all in absolute terms [upward] [Ph] growth.

And then, Oak, maybe if I could dive into the 15% CAGR through 2026, it's a big number, it's a step-up from what you guys have been talking about before, certainly there are strong demand characteristics in terms of underpenetration in the marketplace, but I'm wondering why your comfort level is so strong at this current time? And a couple of items in clarifications, what are you thinking about in there in terms of GA contribution? It sounds like LEO contribution -- Well, potential LEO contribution really isn't build into that; that comes in the back-half of the decade, and maybe if you can get to on top of that too. The potential LEO investment, I'm not sure if I have heard you size the magnitude of what that would require? Thanks.

Yes, sure. Scott, let's break that question down into a couple of pieces. I'm sorry, you started with --

The 15% CAGR really -- the confidence level by now, and what are you factoring into that?

Yes, sorry, thank you. Yes, the great thing about that number frankly is that we lost a really high growth year of 24% at the beginning, you know, the recovery from COVID we had tremendously strong growth. That came out of the model, and we added another year at the end. And so, being able to hang in at that 15% CAGR we thought was really good. And in terms of projections, we should build these models from the bottom up, and we are looking at demand in various segments of the market, and how it flows through the distribution channels. So, we are pretty confident now. Right now a lot of this growth we are already booking orders for 2023. So, we have pretty good visibility as we look ahead at least over the next couple of years, and when you look at the unpenetrated market and the fact that we are getting traction in some of the less-penetrated parts of the market, we are very confident in these numbers, barring you know, a massive global recession or this unfortunate war blowing up on us, and causing some macro events that come in and pinch on us. So, we feel good about that. In terms of the GA, what we have in a mile now or sort of our current GA commitments, and then we have got a few other things going that we factored in that we think are fairly high probability, it's not a big number frankly, but there is some GA included in there. LEO is not in. In our vernacular we call that an overlay, right now it's sitting as a long-term financial model that we haven't laid into our long-term projections. When we green light it, then we are relevant. And we haven't really sized it, other than to say, it's relatively modest compared to our 5G investments, and I think you know that our 5G investment is. Also the LEO investment would be spread out a peanut butter little more than the 5G investment is, and most of the 5G investments this year. The LEO investment would be -- you know, it's going to take a couple of years of development, and so, it's moved over two, three years.

Perfect, thanks. Nice quarter, guys.

You bet.

Thanks, Scott.

And your next question would be coming from the line of Lance Vitanza with Cowen. Your line is open.

Thanks, guys. Thanks for taking the questions. I had two, the first is on the long-term financial targets, the meaningful increase in your targeted EBITDA margin, and I'm wondering if you could discuss the factors that are leading to your more encouraging outlook there. And then, in particular, part of that, how does competition, potential competition figure into that longer term target, in particular, [Volvo] [Ph] and SmartSky does get it back together, should we expect that would negatively impact your margin target? Thanks.

I'll start from the end, and then, Barry why don't you take the beginning of the question. In terms of our long-term model, we do factor in competition, and we project continuing in a positive trend for our geo competitive in the segment of the market they address, or are starting to address. And then from a SmartSky, we have included them in our projections, we don't project them getting to many success, but in order to be conservatively we have assumed that they actually launched at some point, and win some portion of the aircraft. So, as we watch them, as we learn more about them, and we do deep analysis, we think the success are very low there, to be honest, but we still have them in our models.,

Yes, Lance, up to your question about EBITDA margins and why we see there is going up, there is couple of drivers in that, in couple of years we do expect to have lower equipment margins as we invest in the penetration of the AVANCE platform as we have talked about. So, that's a very conscious effort to use that to drive service revenue. So, what's really driving that expanded margin over time is the growth in the service revenue, combined with operating leverage. So, when you look at OpEx as a percentage of revenue over time we expect that to come down meaningfully. We're seeing that as we drive the kind of G&A reductions that we have talked about for a couple of years, and we are seeing that happen, and so, really it's a combination of the mix of strong service revenue and operating leverage without having to increase the OpEx at the same rate as the revenues are growing over time.

Thanks. And then just lastly for me, Oak, you gave your assurances that Gogo has not infringe on the four patents that are identified in that current SmartSky lawsuit, but can you offer assurances that Gogo hasn't infringed in any of the other patents as well?

Yes, our lawyers and engineers have reviewed all of their patents, and we do not infringe on any valid patent of theirs, and we have stated that before. I'm not going to get into talking about these four in particular, just because from a litigation perspective we don't want to tip our hand in anyway to them, and they do listen to these calls. So, I refrain from talking about the four in particular.

Thanks, guys.

And your next question comes from the line of Ric Prentiss with Raymond James. Your line is open.

Thanks. Good morning, everyone.

Hey, Ric.

Hey, Ric.

Couple of questions, one to follow-up, obviously supply chain is the key item in a lot of industries, it sounds like you have been trying to get some more supply. How should we think about dollar-wise, last year you spent about $10 million to get in this, kind of pre-purchase stuff, how should we think about magnitude of what you're trying to put to work this year to mixture, you got supply?

Yes, Ric, the $10 million, we didn't spend all of that last year. So, the $10 million is the amount that we are looking to spend this year. So, we have identified the needs for meaningful portion of that, but not all of it. So, we will use that to drive it in combination with the other things we are doing, Ric, you know, a number of things we are doing, running IMRP program, it was a much longer horizon, 18 to 24 month, so that shows the demand that we can then place orders on, so we can get unparalleled vacation. We have designed the products with alternative parts that we can get, so that we are not completely relying on sole source parts. We actually helped some of our supplier's source parts when they have not been able to do that. So, we are doing a number of things to really drive that supply chain success. And as we mentioned, we feel good about being able to deliver on the expectations for equipment that we said on this call, but everything the demand could drive higher opportunity there. And so, that's really the piece we are working on now, how do we increase the supply chain capacity to deliver on those potentially higher opportunities.

It makes sense. Another hot topic is inflation. How are you guys looking at inflation? How is it affecting your business?

Yes. So, we have some inflation built into our plans. We have wage inflation built in. We have cost inflation on our materials. So, we have that built into our plans. Interestingly, meaningful portion of our cost structure is not generally tied to inflationary trends. So, like backhaul and the network operations, we have seen actually some declines in that over time as backhaul costs getting more aggressive. And when you combine that with high gross margins, it's not like being in the grocery store business. So, with the high gross margins, we are little less vulnerable to that than we would otherwise be, but it's certainly something we're remindful of.

And last one from me is, over the months of November-December to January, the phrase "5G" started taking on a very different connotation to consumers, the process of FAA going up, kind of scaring people about what could happen with air travel with the C-band, but they're not actually called C-band, they're calling it 5G. What have you heard from your OEMs and dealers and end users about 5G? Are they concerned about what 5G means? Are they concerned about anything with aviation related that way, affecting your sales or just impacting concept of what 5G means?

Yes. I think we communicated well with our distribution channels, and I think they all understand the difference between the C-band and the spectrum we are operating in. And frankly, understand that the media kind of confuse C-band and 5G. So, 5G as you know uses lots of different spectrum. And the spectrum we use isn't anywhere close to the spectrum that was in question. So, we haven't seen any impact on our sales as a result of that.

That's great, because obviously it cause lot of [confirmation] [Ph] even just inside my household people going, "Can we fly?" So, yes, you can.

Well, most of that has been cleared up. The FAA has cleared most of the altimeters in question, yes.

Yes, good fit here is not factoring demand or concerns. All right, thanks, guys. Stay well.

Thank you.

And your next question comes from the line of Landon Park with Morgan Stanley. Your line is open.

Thank you. Good morning everyone.

Hi, Landon.

Hey, I was wondering if you guys I think last quarter you guys said that your backlog lead time had stretched all the way out still six months. I think you referenced earlier that you are already taking [measures] [Ph] for '23. So, where is that lead time at now versus last quarter? And is there any thoughts there on when that might start to normalize?

Well, we are very creative in terms of how we manage lead time. And we don't want to miss an install if we had the opportunity to get it. So, you have to understand that in our market, jets come in for their maintenance in a very scheduled manner. So, the MROs and dealers would have their floors booked up now pretty well for the year. And, we've been able to meet that demand so far. So, that's good. So, look, if somebody came in and needed a box in three months, and showed it to you how to get it to them, we are -- technically, we are booked into the fourth now, but we never want to miss an order.

Okay.

And the 2023 orders we have got, because of lead time that's just because of the MROs buying equipment for specific maintenance event that's going to happen in 2023, not in 2022. Most of the stuff we get is when it goes to deal most of what we ship is booked for a particular customer already.

Great, thanks for that color. And then on the capital returns, I think you guys referenced the four times of that. I think that was a 2G number. Is that also the long-term level that you are comfortable with when you are considering buybacks or dividends? Or, how are you thinking about where that long-term leverage should settle out?

Yes, we think about it in two phases, Landon. The first is that we want to get to net leverage ratio of less than four times. And then as -- and that will kind of be the threshold at which we start to really think about when we might consider return to capital what that timing might be. As we discussed, we need to make sure that we finish right sizing the strategic investments to inform that decision. So, getting to less than four times is the initial target. And then what we would run the company with beyond that is something that we will look out more carefully as we hit that ratio and see what the right level of that is on an ongoing basis, but for now, it's taken around less than four times.

Okay, great. Then just the last one from me, on the lawsuit the preliminary injunction, do you have an expected timeline on when that matter could at least be settled?

No, I mean frankly this news is relatively new. We did anticipate this happening at some point. Frankly, we thought it would happen a little closer to our 5G launch than it is. We have actually not even received papers yet. But, we factored this into our budget and some money already set aside for defense. And I think any guidance on timing now would be premature.

Okay, great. Thanks very much.

Thank you, Landon.

Thank you. And you next question—

It's last question, Louie, yes.

And your last question comes from the line of Louie DiPalma with William Blair. Your line is open.

Great, thanks. Oak, Barry, and Will, good morning. For Barry, can you please repeat the comments that you said about the potential share buyback? Just because it seems to be a pretty significant contract relative to Gogo's history in which you previously alluded to how you had 10 times leverage and you are used to be burning $100 million or more in cash on the quarterly basis. And so, what are the different stages and thresholds in terms of leverage and timeline associated with 5G and the LEO broadband initiative that investors should consider as you and your Board of Directors evaluate a potential share buyback? Thanks.

Yes. We are in a very different place than we were from time first started to having these conversations with you as you know. So, it's a privileged position to be in and to be able to even think about these things. So what we said is that we expect to achieve this net leverage target in the second quarter of '22 and after the equitization of the convertible notes in May. And given the cash position and the dilution from the equitization that our Board is evaluating capital allocation strategy that may include share repurchases. So, it's something that we are looking at. And the things that inform that will be the amount and timing of the strategic investments and things like global broadband. We want to make sure we are conservative about those and have ample dry powder for those. But having said that, we are going to -- we are in a strong cash position now. And it's something that we are evaluating in terms in terms of what the right time might be in this context. So, we are in a privileged position…

Thanks, Barry. And for Oak, I was wondering what is the development status of LEO satellite antennas for business aviation? Are there any antennas available now that you are currently trialing on aircraft? Or, are there any available for other service providers? Or, are these antennas still in the development stages?

In the development stages, Louie, I mean there is a lot of debate around antennas that will access LEO constellation. We think the best technology is electronically steerable antenna. And, we are in the process of talking to providers that we would work with in developing one. We are not going to give away our secret sauce in terms of what we think about design on this call. But, we know the BA market very well. And our goal is to design something that is very particular to that market and will fit that market. In terms of ESAs, aviation I mean they have been used in the military for quite a long time. They are very, very extensive in the military. And they are in development for commercial aviation now. And there are some that I think are in an experimental status at this point and have been put on jet and flown. So, those are much larger clinically than what would fit on a business aviation aircraft. And the trick is the smaller the antenna, the lower the power. And as the power goes down, the harder it is to maintain the link budget with the small one. So, that's why it's been a challenge in business aviation. And it's a matter of being able to get enough power, have it work without creating too much heat in the aircraft, and building a home fuselage and get enough power. You have got a good signal and a good product. And that's difficult, but we're working on it and we are optimistic.

And one final question, Oak. Do you have an estimate for how many days would it take an MRO to install the 5G antenna for a customer that already has the AVANCE L5 system? And how complicated will that upside be?

Well, the antenna swap, initially it involves the addition of a small modem box as well. We are looking to simplify this over time. And so, we have more to say about that later. I am not going to estimate the exact number of days. I think my idea that partners would like to keep that between themselves and their customers. But it's -- no one here is complicated as installing a new system, because all the wirings in place, the box, the main box is in place, the cabin fairly been installed with wireless access points, and all that. So, it's a lot simpler than starting with a new system. The other point I was going to make, I'm having a senior moment, you had asked about the amount of time, Louie, what was the other part of your question?

The complexity, and you basically answered in terms of the --

I'm sorry. The other part -- the other thing I was going to say is that because we are going to be able to start shipping antennas, you know, now that we have TMA, we are probably going to start shipping some of the equipments that people can actually get pre-fitted with -- pre-fitting with the antennas, and some of the other stuff, and they go in for maintenance, this year even though the 5G product isn't launched. So, they will just be ready for like a back slope of when the product actually launches later. So, we are giving the people essentially an opportunity if they have a maintenance event, and sort of a pre-install lot of that you need to actually implement 5G with AVANCE.

Sounds good, thanks. Thanks, everyone, and congrats on the quarter.

Thanks, Louie.

Thank you. I would like to turn the conference back to the company for any closing remarks.

Okay, thank you. That concludes our fourth quarter call. We appreciate your participation, and talk soon. Have a great day.

Thank you, all.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.