Good day, and thank you for standing by. Welcome to the Gogo Inc.'s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. William Davis, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Rene, and good morning, everyone. Welcome to Gogo's first quarter 2022 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. Those 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 May 5, 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 first quarter earnings release. This call is being broadcast on the Internet and available on the Investor Relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Oakleigh.

Thanks, Will, and thank you all for joining us this morning. The first quarter results, we announced today reflect our continued strong momentum, as we execute on our strategy and capitalize on the unprecedented demand for broadband connectivity solutions and business aviation. I'll focus my remarks today on three buckets: BA industry demand for connectivity, Gogo's strong first quarter results and our progress in two of Gogo's key strategic initiatives. Barry will then walk through the details of our quarterly performance and update our 2022 outlook. And then we'll open up the call to your questions. In the first quarter, Gogo delivered record top line revenue of nearly $93 million, up 26% year-over-year, fueled by strong service and equipment revenue. Our results demonstrate that demand for BA travel and connectivity continues to accelerate. The three variables driving that demand are: first, the growth over the last decade of the number of high net worth individuals who can afford to fly privately. Second, the COVID pandemic, which led many in that cohort to try private aviation. And third, the acceleration of the digital transformation brought on partly by COVID, as demonstrated by growing usage of video intense social and work-related applications like TikTok, Zoom, Office 365 and the like. These are all trends we believe will continue. In a recent survey, 91% of business jet passengers today will fly privately either the same or more versus in 2022 versus 2021, with 51% of those saying they will actually fly more flights in 2022 than 2021. We also believe the propensity of these flyers to demand insight connectivity will continue to grow, driven partly by passenger demographics shifting to younger age groups. Traditionally, business aircraft passengers skewed more towards baby boomers or older, but in our recent Gogo brand survey, 67% of…

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 and capital allocation strategy, and I'll finish up with some additional context around the updated 2022 guidance we announced this morning. During this quarter, we delivered record performance on multiple fronts; record service revenue, record total revenue, record equipment backlog and record adjusted EBITDA. These records are the result of continued solid execution by the Gogo team in a vibrant market as higher-than-expected equipment shipments led to high-margin service revenue growth and increased profitability. Total revenue of $92.8 million in the first quarter grew 26% year-over-year. This was the highest ever first quarter revenue for the company with strong trends in both service and equipment. We achieved record service revenue of $70.7 million, driven by an increase in ATG units online of 11% year-over-year and 2% sequentially. Our track record of continuing growth of ATG units online is evidence of the tremendous white space in a market that is only about 30% penetrated with Wi-Fi connectivity. Notably, we continue to -- our strong trend of adding new customers with 61% of ATG activations in the quarter coming from new customers. As we have described, penetration of our advanced products across our installed base and with new customers is the centerpiece of our strategy. These equipment installations drive increasing service revenue and provide the other significant customer benefits of the extensible AVANCE platform Oak has highlighted. In the first quarter, AVANCE units online grew 42% year-over-year to 2,699, an increase of 8% sequentially. Our year-over-year AVANCE unit growth has averaged about 45% over the past six quarters, and we continue to expect AVANCE to reach approximately 50% of our…

Thank you,sir. [Operator Instructions] We have our first question from the line of Lance Vitanza with Cowen. Your line is now open.

Hi. Thanks, guys. Thanks for taking my questions and congratulations on the great quarter. We're to begin. I guess on the unit shipments to air-to-ground unit shipments, 1,300 for the full year, if I'm looking at the press, it looks like that suggests pretty substantial acceleration from the pace – and I'm just wondering, certainly ahead of the number that we had been modeling. What – can you talk a little bit about what gives you the confidence that you can get to that 1,300 number? I mean, how much of that is sort of contractually in backlog? How much of that is just sort of your sense on where the business is going? And then I have one follow-up question, if I could. Thanks.

Yeah, Lance, the real governor on our unit shipments this year is supply, not demand. The demand is tremendous. So the real confidence comes now and that we've secured all the componentry we need to hit a 1,300 number, and that is all well in place and in hand. On the demand side, 95% of those of that number is – got a name on it in terms of where it's going and what it's being installed in. So we're almost already sold out of the increased 200 units it that way. And frankly, I think we see signals that there could be a lot more demand later in the year than even in the 1,300 number. So we're seeing now and working hard now to see if we can secure more supply.

Okay. Thanks. And then my follow-up is really actually on the LEO global broadband strategy. There's been an increasing amount of conversation on these earnings calls around this. So it certainly feels like things are happening more quickly than perhaps, we had expected. Is that the case, or is this still something that you see potentially rolling out? I guess, what is the time frame that we should be thinking about in terms of making an announcement of finding partners and then also more importantly, when you think you could be someday in service with the global broadband product. Is that still sort of towards the end of the decade, or is that the middle of the decade? How do we think about that? Thanks.

Yes. We're in active conversations with potential partners, as I said in my comments. And we'll provide more detail when we have those partnerships nailed down and we're ready to talk about our plans. I would – in terms of timing, it will take probably two years or so to develop the equipment that we'll be putting on the aircraft and so that's sort of one critical path. And then the other critical path part of the critical path is LEO Networks actually being completed that can service us. So – and that's also probably about two years. So I'd use that in your mind as to being when the earliest we could have a product out. And we're going to move as quickly as we can. When we view this is very important. It's a competitive response to potential other LEO providers trying to come into our market or other people partnering with LEO market coming in, and we don't want to be a laggard at that. We'd like to be the leader. And frankly, these constellations are still in progress in terms of being launched. So that's a governing factor as well. So I would say, mid-decade on, we expect these to accelerate our growth, both on the top line and bottom line. And that most of the financial benefit of this will be from 25 or 26, 25-ish.

So really just as sort of the current long-term plan is kind of wrapping up. Okay. Great. Thanks again for taking the question. I'll share the time.

Yeah. Thanks, Lance.

Thank you. Our next question is from the line of Landon Park with Morgan Stanley. Please go ahead.

Great. Thank you. Good morning, everyone. Just following up on the backlog question, I'm wondering, if you can provide any more details in terms of what type of L3 versus L5 and maybe what types of aircraft you're seeing the demand come through from in terms of aircraft size and stuff like that? And then just a second question. Could you touch on the SEC funding that you applied for earlier this year and how you're thinking about the potential to receive significant funds?

Yes, sure. In terms of the L3, L5 mix, I don't have that at my fingertips. But L3 has grown as a percentage of our advanced sales this year. But I'll leave it to Barry in a moment maybe he'll provide the L3, L5 breakdown. In terms of the aircraft size, we're having -- we're seeing growth in all segments. As you know, we've had considerable success getting down into the general aviation market this year with Cerus. And we have a lot of activity in that space. And then across the light medium and large jets, we've seen growth in every segment. So there's been no real skew there. In terms of the FTC, government subsidies are designed to get you to do things that you wouldn't view as economically viable on your own. And we would be removing the ZTE equipment over a much longer time frame. If it weren't for the availability of a subsidy like this, depending on what we receive, we'll decide whether it's enough to alter our behavior or not. And if it is, we'll accelerate the removal, which is what the government wants us to do. So I'm going to leave it at that for now. We'll see what happens. I think the SEC announced the decisions in June on this. There's a lot more demand for these dollars than they anticipated. So very hard to tell right now exactly where all that will land.

And Land, just to provide some specificity on your question around the backlog. In general terms, we expect the split between L5 and L3 to be about 50-50 for all of 2022 with perhaps a slight skew to a little bit more L5, but think about it in terms of roughly 50-50.

And should we still be expecting overall equipment margin to compress year-over-year, or are you guys taking on that...

As I mentioned, we do expect equipment margins to be in the 30% range for the balance of this year. That is higher than we had previously expected as we're seeing that we do as the average selling prices are not coming down and we're not required to do as much discounting as we might have projected. But as I mentioned, this is very much in line with our strategy to drive advanced penetration. So we're happy to see those equipment margins even be at that level, which, of course, is still additive to our unit economics, but really gets the advanced penetration and unit installations up there.

Great. Thanks, Barry.

Thank you. Our next question is from the line of Ric Prentiss with Raymond James. Your line is open.

Hello, everybody. A couple of follow-on questions. I appreciate the time today. A follow-up on the Lance's question. Obviously, I appreciate the color on the earlier program possibility. I think Oak you mentioned externally developed could be about half the 5G investment. Help us -- remind us about what that total 5G investment is just so we can get a ballpark on what the half of the 5G investment would be. And when it says externally developed, what would you imagine your cost as far as splitting it roughly between OpEx versus CapEx spend?

Yes. So, we've always said that 5G external costs would be about $100 million. Barry can correct me if I got that wrong, but I believe about $100 million. So, I think that's the guidepost you can use. We have -- and external both cost of equipment, R&D, and other things, so that's what we're guiding to here. The rest of it is, frankly, just baked into our internal costs are already just baked into our guidance. It's just using our resources that are already in OpEx and CapEx for the guidance we've provided in the past for the five-year plan.

And Ric, a little bit of color on the split. As you know, 5G is substantially weighted to CapEx on the order of two-thirds of that $100 million of CapEx. For the global broadband product being less than the half of that total $100 million number, the lion's share of that will be in OpEx. So, it's going to be a much more development centered project. We don't have to deploy towers and those kinds of things, obviously. So, the CapEx spend is much lower.

Yes. So, that's a bit more OpEx trade, but you're only spending half that level. When you think about potential partners on the LEO side and the antenna side, maybe you don't want to get into specifics, but how do you -- what do you consider important success factors as far as picking partners. A lot of LEO constellation out there some launched, some not launched, but what do you think are the important factors as you consider partners as far as what they would bring to the table?

Yes. Well, obviously, in terms of the LEOs, it would be the probability of them being launched is a very important one. So, that's foremost in our minds on that. And in terms of the rest of our partners, I probably don't want to get into that in too much detail, but obviously, we're looking for people that have the expertise to what build what we want them to build to our design and the timeframe that we want to deliver. So...

Okay. And then just one kind of housekeeping one. You both mentioned the litigation fees, I think it's $5 million this year. Do you include that in your EBITDA? Any thoughts on other than just calling out like excluding it? I know there's some accounting rules out there, but why I think some other firms would pull that out possibly when they report?

Well, I did ask the question, Ric, but we came to the conclusion that we've had legal fees associated with litigation in the past. We've had the shareholder lawsuit, we've had various patent all suits. And we've never pulled that out in the past of EBITDA. So, we thought that pulling it out now would be inconsistent with that and that inconsistency was inappropriate.

Appreciate the color.

We did want to provide the number though, Ric, because certainly, as you look at this, you can pull the number out from the recurring EBITDA number, obviously. So we thought it's helpful for the suite to be able to know what that number was.

Exactly. And final one for me. Appreciate the time. Obviously, inflation is in the news. As you think about interest rates, effect on your numbers and labor costs and inflation costs, how should we think about how the current financial markets are affecting your operations and your view going forward?

Barry, why don't you take the question on our operations and then I can talk about the market a little bit.

Yes. Regarding inflation, Ric, we kind of think about it in three parts. It is built into our forecast, by the way, and planned for in our guidance. But the first is, increases in wages and we have budgeted for larger increases in the past than in the past, based on what we're seeing overall. The second piece is on component cost increases. We do have long-term contracted purchase orders that lock in future pricing and materials. So, component costs in aggregate will rise gradually overtime, we do see some increases on a component-by-component basis, but we'd expect that to increase overtime. Importantly, the cost of equipment is only about 20% of our total OpEx spend. So, we're less vulnerable there. And then the third area is related to our cost of service, and we actually see a meaningful portion of that cost structure like backhoe not subject to inflation. And in fact, our overall ATG cost per megabyte and unit terms are expected to stay flat or decline over the five-year planning horizon. So, we feel like we have comprehended inflation into our forecast, but it's something we monitor very carefully.

Yes. And then taking that just a step further and thinking about potential recession and high interest rates and all that and how that could affect our market. It's interesting when you look at the market, we've performed very well through the '08, '09 financial recession and through COVID obviously. And in '08, '09, the business aviation industry went through a huge downdraft. It was -- it went from over 1,000 aircraft deliveries a year to 500. And it stayed very low for a number of years. But our demand was sort of singly unaffected. We continue to sell very well through that period. We – of course, we lost right before that period. So, it was a pretty new market, but we were able to drive significant service revenue growth through that period. And then in COVID, we did have a downturn in equipment orders in the second quarter of '20. But for the year, I mean, our service revenue was only down 4%. So pretty resilient in that recession as well. So, as we look forward and we think about the impact of a recession, we could see a slowdown in with our red hot equipment sales at this point, but we see none of that so far. But we would expect our service revenue to be largely unaffected by it. And I think past history sort of bears that out.

Great. I appreciate that. Thanks guys. Stay well.

Thanks Ric.

Thank you. Our next question is from the line of Scott Searle with ROTH Capital. Your line is now open.

Hey good morning. Thanks for taking my questions. Oak, Barry great job on the quarter, particularly on the operational front.

Thanks, Scott.

It's probably premature, but given your visibility to 2022 at this point, we'll exit the year at still less than 1/3 penetrated into the BA market, what are the early thoughts for 2023? Is the initial expectation that we see another 1,300 ATG units going out the door? Is there some moderation on that front? How are you thinking about it?

Yes. Well, I think we'll update ’23 in the second quarter call, probably. We haven't really flowed all that through. In our long-term model, it stands now – Barry what is it? We have about 11%-unit growth each year. Is that what's projected in there?

Yes, the 15% growth, that's right. It's -- the units, yes, the aircraft online are in that 11%, 12% range and the balance from an increase in ARPU.

Okay, right. So that's what's baked in there so far. We are taking orders already for '23. And so, we have a pretty sizable chunk of orders actually going out into 2023. So -- so far, the averages are good. And of course, we expect to have a pretty big lift in service revenue from the increased units we're selling this year, which would be above what we projected in the long-term model. So we'll have more on that, like I said, in -- on our second quarter call after we've done our reforecast for 2023 Q – Scott Searle: Very good. And if I could, maybe looking at 5G, it's nice to see that everything remains on track from a technology development network standpoint for a second half launch. I'm wondering if you could give us some insight into the interest level of 5G and what you think the penetration adoption upgrade cycle would be? And give us some color in terms of costs for upgrade with existing AVANCE systems and timing for aircraft to be upgraded. And I guess as part of that, you've been talking about a 4% to 5%, I think, ARPU increase over the next several years. Yes, we've been running at 8%, I think, the last couple of quarters, and that's even pre-5G. So how does 5G impact that ARPU SKU as well? Thanks. A – Oakleigh Thorne: Yes, the way we think about 5G is that -- we expect to start some meaningful shipments in 2023 with the announcement by the end of this year. It is a relatively slow ramp as people upgrade and over time. So it's going to ramp during the planning horizon. And just to give you some context, Scott, the advanced product line is the most successful launch in business connecting aviation history really. And it's at about 25% after four years or so. So that was the fastest ramp. So I think you wouldn't necessarily see it quite that fast, but so it will take some time to build. But importantly, it also drives the ARPU. So we have meaningfully higher ARPU expectations for 5G, and that's what's partly driving that lift in ARPU expectations. So I would say that for the first orders that we're seeing from 5G that, that is an affirmation of the customers' interest and pay more for 5G because of the performance that it's expected to deliver. So the early signs are positive relative to what we have put in the model. Q – Scott Searle: Thanks so much

Thank you. Our next question is from the line of Louie DiPalma with William Blair. Please go ahead.

Both Barry and Will, good morning.

Hi, Louie. How you doing there.

Good morning.

Barry, congratulations on your eventual retirement.

Thank you, Louie. I'm not done yet, and it's going to be in great hands with Jesse. So you all have to put up with me for a while.

Indeed, I have a question. It seems that the extinguishment of the convertible debt is imminent. So what share count should analysts be using for Gogo?

So it will be about 134 million shares after those 17 million shares converted.

Sounds good. And in terms of capital allocation, you discussed leverage are -- is a stock buyback and/or a potential dividend? Are those still being considered after you reach your leverage target?

Yes. We're very systematic, and we think, quite disciplined about the way we're approaching capital allocation. And as we said for a number of quarters now, we're -- we think about this in the sequential priorities of getting 5G Jen, getting the leverage where it needs to be investing in ways that's going to enhance the value of the business like with Gogo broadband and then returning capital to shareholders. So we have made very good progress in the first three of those, 5G on track is still to be finished, obviously, but on time and on budget. Financial leverage will come below that, 4 times this quarter. And then as Oak described in some detail, we are very seriously evaluating this global broadband investment, which takes the level of investment that we described. So we are actively pursuing a capital -- an analysis of returning capital to shareholders, but it's in that context. So as we look out to the capital generation capability of the business, it certainly is there over the next several years. So it's something that we'll be mindful of and know that it's an important factor for the shareholders.

Great. And final one for Oak. Oak, how fast is the 5G network in initial trials with the 35 cell sites that have been completed? And does the carrier aggregation/channel bonding works that combines the -- your 850 megahertz signal with the, I think, the 2.4 gigahertz signal? And with that backdrop, like is -- like a LEO like broadband product even necessary over Continental US if the 5G network works as advertised?

Well, I guess, first of all, we think it's a strategic imperative to continuously improve the quality of your network to remain competitive. So the idea that you could aggregate 5G with LEO in the same router and distribute it through the aircraft, we think is a great positive about GDB and solidifying our customer base in the US and continue to grow it, and makes it extremely competitive in the US market with any potential LEO provider coming in and trying to compete with us. So we view that as very important. In terms of the rest of your question, I mean, you have to recognize that in terms of our testing, with one tower, we could see that the 850 and 2.4 work. So that's been verified and that's not an issue. On those other towers, they haven't been lit up yet. So we'll know how all that gets tested a little bit later.

Sounds good. And you just mentioned, dually using a potential LEO product with your ATG network, would that require like substantially more like hardware on the plane?

No, no. That's built into AVANCE. I mean the benefit of AVANCE is it's got a very unique multi-bearer capabilities, it bears the networked. So we could handle multiple networks going into the same box and then being blended into one user experience. As opposed to today, where you might have two networks, ATG and a geo-satellite, but you have one on and the other one is not turned on. In the Gogo multi-bearer and AVANCE, both can be turned on and both you can essentially add the capacity of the two of them, and that's the capacity of the aircraft. So if we're delivering 50 megabits per second with ATG and another 100 megabits per second with the LEO product, there's 150 megabits per second coming to the aircraft.

Right. So it'd be additive. Okay. Thanks. Thanks Oak. And thanks to everybody.

Thank you.

Thanks, Louie.

Thank you. Our last question comes from the line of Anthony Klarman with Deutsche Bank. Your line is now open.

Thanks. Really just two follow-ups. First, on the potential for the global LEO broadband partnership, just to sanity check that, I guess, I'm assuming that there's no spend on a potential partnership agreement like that, that's included in the long-term financial targets. So theoretically, to the extent you were to sign an agreement that commercialized at some point during the planning horizon, there might be some incremental spend associated with that. But then theoretically, I guess, there's also no inclusion of revenue from that in the 15% CAGR that you put out for 2021 through 2026?

Yes, right.

Yes.

First of all, yes, there's -- global broadband is not in our baseline numbers that are the foundation of the long-term guidance we've given, they're what we call an overlay. So we'll share more detail on that overlay if and when we announce the project. So that's number one. Number two, the business model with the LEO provider is a managed service model. So we would be paying by the drink essentially for usage. So there's no real cost there prior to having revenue to pay for it.

Got it. I guess I was thinking more along the R&D and equipment or CPE lines, but I guess even that is more of a back-ended when the constellation is launched and ready-to-go type investment?

No, no. That -- yes, we're going to be creating the -- and developing -- sorry, the equipment that goes on the aircraft, which is essentially an ESA, electronically steerable antenna.

Yes.

And a couple of wires that run down into the aircraft to the advanced box that's in the aircraft. So there's not a whole lot of new equipment to develop other than that, but that's something we will fund, and that would happen in advance of going revenue Yes, that would be the initial investment that I talked about over three years.

Understood. That's clear. So if I think about the free cash flow guidance in the long-term targets, which you have at 125 in 2023, getting to over $200 million by 2025, Essentially, that's all coming from underlying base business EBITDA growth, essentially CapEx is relatively flattish once you get past 5G. So really, all of that increment is coming from the base business and growing EBITDA over that two-year period.

Yes, that's right. That's absolutely right. So, we think -- just to be a little transparent. The service revenue will be more than in that guidance. And so that will help free cash flow some. We may have a little bit of slippage of some 5G spend into next year that might hurt free cash flow, though just by timing of invoices. So we'll see how that all shakes out. I mean the investment in global broadband product would be obviously negative to free cash flow, but it may not be -- we don't know if it's going to change that guidance or not yet. We'll let you know when we're done with the 2023 projections.

Understood. And then, Barry, on the adjusted EBITDA with the litigation expense, just to check to make sure I understand that what you were saying in response to another question. I think in the 10-K, you had not yet reserved anything against SmartSky. So is this an actual accrual against a future potential litigation expense, or is it actual cash expense that you expect to go out the door? I guess you're using the term more of expense than an accrual. So I just want to check whether it was cash or an accrual against a future potential outcome.

Yeah. The way we think about that, Anthony, is that that's the amount that we have earmarked to defend this suit through the preliminary injection period. So, that is net of the EBITDA. So, the way to think about that is that EBITDA range of $150 million to $160 million. And now we're saying we're coming at the high end of that range, and that is accommodating that $5 million expected spend in the high end of the range guidance.

Yeah. Understood. But you're -- I think you're also answering my question of. It is actual cash expense, because it's including the cost of defense in the suit and some of the other cash expenses as opposed to an accrual for a potential future liability?

Yeah, once we proceed through the suit, this represents the cash outflow for defending ourselves in that suit.

Understood. Thank you very much. Yeah, it does. Thank you.

Thank you. We don't have any further questions at this time. Presenters, please continue.

Will?

Thank you, everyone, for joining our first quarter earnings call and we will look forward to speaking with you next quarter. Thank you.

Thank you. Appreciate your time

Thanks all.

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