Good day and thank you for standing by. Welcome to the Second Quarter 2022 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Will Davis, Head of Investor Relations. Please go ahead.

Thank you, Crystal, and good morning, everyone. Welcome to Gogo's second 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. Also listening in on the call is Jessie Betjemann, Senior Vice President of Finance, and Chief Accounting Officer. Jessie will assume the role of Gogo's CFO in early 2023. 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 August 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 second quarter earnings release. This call is being 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.

Thanks, Will, and thank you all for joining us this morning to discuss Gogo's record-breaking second quarter results. Since our last call, the macro trends around inflation and interest rates have created a major challenging and economic environment for many companies. The companies with clear competitive advantages and recurring revenue streams that drive robust cash flow are well-positioned to deliver for shareholders even in these turbulent times. And after the transition we've gone through the last two years, Gogo is now one of those kinds of companies. As I'll discuss in detail today, the fundamental trends driving business aviation connectivity are still intact, resulting in continued strong demand for Gogo's equipment and service. Gogo also benefits from a business model that [mutes] [Ph] the impact of inflation, which Barry will discuss in a few minutes. We're the leader in BA IFC today, and the innovative products we bring to market, like our AVANCE platform and our 5G network truly differentiate Gogo and de-risk our strong cash flows for years to come. And we're putting our strong balance sheet to work toward additional innovation, such as our recently announced low earth orbit satellite Global Broadband product, or GBB, that will give AVANCE customers an easy upgrade path to even more enhanced capacity and expand our addressable market outside of North America. Combining these capabilities with the fact that we're able to still generate strong cash flow even in network upgrade cycles, like 5G, and combine that with Gogo's huge market opportunity, 30,000 out of the roughly 40,000 business aircraft around the globe today still have no connectivity. And we feel Gogo represents a very attractive investment opportunity. I'll focus my remarks today on two main buckets, first, trends in the business aviation industry that drive demand for connectivity and drove Gogo's…

Thanks, Oak, and good morning, everyone. In my remarks today, I'll start by walking through Gogo's second quarter financial performance, then I'll provide an update on our capital allocation priorities, and finally, I'll finish up with some additional context around our updated 2022 financial guidance and long-term targets, which now reflect our expectations for our global broadband initiatives. During the second quarter, we achieved several record highs, including total revenue, service revenue and advanced unit shipments. For the second quarter, our record total revenue of $97.8 million grew 19% year-over-year. Our top line was driven by record service revenue of $73.1 million as ATG units online grew 10% year-over-year, and 2% sequentially. Notably, we continue to expand our reach in the market with 63% of ATG activations in the quarter coming from new customers. As we discussed previously, just over 30% of North American business aircraft have in flight connectivity. So, there's plenty of open space in the market to support our future growth expectations. As Oak described, increasing penetration of events and leveraging its platform capabilities, remains a centerpiece of our strategy, both in the North American market where we operate today and globally as we implement our GBB initiatives in the future. In the second quarter, advanced events units online grew 40% year-over-year to 2,893 an increase of 7% sequentially. We continue to expect advanced to reach approximately 50% of our total ATG units online by the end of 2022. As we grew our ATG units online, our ATG ARPU was 1% year-over-year to $3,328. As a reminder, ATG ARPU in the second quarter of 2021, benefited from the recognition of $1.8 million in deferred revenue related to a customer contract; excluding the impact of this deferred revenue, our second quarter 2022 ARPU increased 4% year-over-year, demonstrating the…

Thank you. [Operator Instructions] And we'll take our first question from Scott Searle from ROTH Capital Partners. Your line is open.

Hey, good morning, guys. Thanks for taking the questions. Nice job on the quarter and nice to see all the details on the growth as we go into 2023, even with a little bit of a wrinkle on the 5G front. Maybe to dive in on the 5G issues, Oak, if I could, is the timing delay, is there a new spin that's required on the chipset, is there somewhat technology issue or is this really related to capacity and availability at certain process geometries for the chipset supplier? And I'm wondering also as well if you could couple into that a discussion. Sounds like you're seeing some 5G attach rates in terms of current installations being made to support 5G when it becomes available. I wonder if you could talk about how that is as a percentage of the new units that are going out? And may be also juxtaposition that to the competitive landscape in terms of what you're seeing from SmartSky and Star like?

Hi, Scott. That's a lot of questions, but I'm going to start with 5G. So, now we got here on Monday ready to declare victory on this project, and that we were going to launch in Q4. So, this is very late-breaking news that we got on Tuesday. And ironically, the chip is stuck in test mode and can't be moved to operational mode. So, in testing, it got stuck in test. And the issue there is that the way these chips are built, the multiple layers, test mode [touches] [Ph] almost every layer. And so, they have not been able to identify the exact source of the problem with the test mode. That said, worst case, Scott, would be a respin, and that's why we've kind of talked about midyear, that would be if there was a respin. And maybe there won't have to be a respin, we'll know that in the next couple weeks. We are working with the subcontractor [Aerospin] [Ph], who is producing this chip, hard right now on ways to get the chip done sooner than midyear, looking at some pretty, frankly, innovative ways of actually starting our ability to test on that chip before they would do a spin even, and so giving us the ability to kind of replicate the chip in our system and continue with our end-to-end testing. So, we're working on all that. We're trying to de-risk it. We did reflect a change in projected sales next year when I talked about the 15%; we've been higher than that before this news, so, more to come on that, Scott. We're still somewhat in discovery mode and, as I said, it's very recent news. Second part of your question was -- was that the SmartSky?

Provisioning.

Provisioning. So, yes, we just started this. We had a pretty positive response because what customers can do is the L5 box is actually part of the 5G product, right. So, they can take L5, they can take the MB13 antennas, which are the new antennas for the 5G product, and install that on the aircrafts. Those antennas obviously work with both 4G and 5G, so they'll just be flying on the 4G network for some period of time. And we're selling them the harnesses and everything else that goes in place to handle X3 box that sits next to the L5 and gives you the 5G capability. So, what happened is that they can fly, they will have an L5 experience until we can ship them the X3, and then they just swap it in place and everything's already there, very easy to put in. So, that's what we're doing, and we've had a pretty positive response. I mean, I think the only limit right now is we're just ramping up production of the MB13, so we're a little bit -- we're sort of supply-constrained there. We weren't planning on being launched quite this soon, but that production is ramping up. And I think we've got something like 15 that are going to be shipped this year, and I think we're looking at orders already for next year, 30 of those, and those -- and then we've only been taking them for a couple day -- couple weeks. So, that's that. Then I think your last -- yes, the last piece of your question was around SmartSky and competition. They put a press release out, last week that they are "Live Nationwide." I mean we would agree with that, they're live in parts of the nation across the nation. They're live in the Southeast, goes up a bit to Chicago; they've got some towers around Wichita. We're obviously flying for a lot of the OEMs and big dealers, but there, they're live in Las Vegas, where they've tested and demonstrated several times. And they're certainly live out in California, where they were getting ready for the GSX launch that they lost. But we don't think they have nationwide coverage in -- so, that's still to come. And so, there, the dealers aren't taking them seriously right now. We don't see any traction. They've made some announcements with a couple dealers, but even those dealers, they really haven't sold anything. We've heard of one or two planes that might be getting installed mostly to be used as test aircraft to see if the system works. So, that's, I think where that is.

Hey, great. And thanks for that color. And if I could, just a quick financial follow-up for Barry then, given the timing of the 5G network turning on, I would imagine gross margins on the services side stay a little bit higher in the second-half of this year until you start depreciating the network and maybe some of the 5G OpEx kind of slips into 2023, is that correct?

Yes, regarding the turn-on, that's correct, Scott. So, the depreciation wouldn't start until it gets fully deployed and turned on. And we do expect some of those expenses to slip, as I mentioned, the backhaul expenses we would not have to start quite as soon, so we'd see some benefit from that relative to what our previous expectations were. And then there could be some timing in the -- and slippage from the expenses on both the OpEx and CapEx side because they're tied to milestones. So, if and as those milestones would slip, the time -- the expenses would slip also, and that could go from 2022 to 2023.

Great, thanks so much. I'll get back in the queue.

Thanks, Scott.

Thanks, Scott.

Thank you. And our next question comes from Ric Prentiss from Raymond James. Your line is open.

Thanks. Good morning, everyone.

Hey, Ric.

These are early days, so I'm going to take you right to the updated long-term guidance, if I could, the change from 15% revenue CAGR to 17% revenue CAGR. Help us unpack that, about how much of that is coming from product versus services? And within services, it sounds like, there, you're still taking probably the bulk of service revenue comes from units, with some benefit from [ARPU] [Ph]. But help us understand the change from the 15% to 17%, and kind of the components.

Sure. Really, the primary driver of going from 15% to 17% is the addition of GBB. But that was not included in the previous projection, it was, as we described, an overlay. So, while it's early days, we do expect that to begin to contribute to revenue in 2025. And so, for that planning period, we do see that having a 2% lift in the CAGR. And we see that continuing to really drive revenue growth for the balance of the decade. So, that's really the hope for that project is it's an attractive return on investment and, importantly, by sustaining growth in the revenue growth. In terms of the drivers of the growth, that has not shifted meaningfully between aircraft online and ARPU. So, the lion's share of that, on the order of three-quarters of that 15% previous CAGR, was from increased number of aircraft online, with the balance coming from increased ARPU. And the drivers of the ARPU are as people upgrade their plans and use more data, as Oak described, we're seeing a lot more upgrades to plans than downgrades. And then, as you see the benefit of the 5G product coming online, that also has a lift to ARPU. The offset for that is as we get into the more L5s and come into the smaller aircraft, they have lower ARPU but, importantly, that the unit economics, like on a revenue per megabyte basis are still very attractive to those customers.

And the change from 15% to 17% with GBB, is GBB kind of the same 35 -- 75% units or help us understand the split. There's -- what does GBB look like as far as that incremental, is it units, is it ARPA, is it equipment?

Well, in the earliest days, we'll get the benefit of equipment in, but that, very similarly, it will translate into service revenue. So, it's a comparable service margin -- service model where we would sell the equipment, we get a margin, and then that drives into the high-margin service revenue.

Right. And as far as [indiscernible] because I think Ecostar mentioned yesterday they expect to start selling new ESAs, earlier probably some supplemental-type certification you are having, but as far as GBB revenues, we're thinking it's kind of more of a '25 thing?

Yes, that's our expectation, yes.

Okay, thanks, everybody. Stay well.

Thank you, Ric.

Thanks, Ric.

Thank you. And we'll take our next question from Lance Vitanza from Cowen. Your line is open.

Hey, thanks, guys, and congrats on the quarter. I want to start with [AVANCE] [Ph] shipment outlook. What does greater than 15% shipment growth translate to in terms of aircraft online, which is how I drive my model, at least, will aircraft online be up 15% in '23 versus '22 or is there sort of a walk-down to something lower than that?

Yes, I think what we'd expect, Lance, is for us to see that proportionally carry forward as it does for our ongoing business. And as you know, major portion of the unit shipments are for upgrades. And so, that modestly helps the ARPU. But, very importantly, that is very much in line with our strategy of driving AVANCE penetration. So, that's really what we're trying to do. And so, that will supplement that objective as well.

Yes, I'd say, right now, about of the third of units are upgrades. As we go forward, we're projecting that to pick up somewhat, and two-thirds are new. The -- remember, Lance, we'll be getting planes -- a lot of what we ship this year will lag -- won't get installed until next year. OEM orders, in particular, are usually bulk orders, and so they can sit on the shelf for a while. We have seen a lengthening in the time between shipment and install, and the dealers, just because in a supply-constrained world, dealers are ordering sooner than they did in the past. And I think that's gone from, what, Jessie, four months to five months, something like that in terms of lag time. So, we've seen a little extension there. So, in terms of the units shipped we're going to do about 1,300 this year, as we said. And that you can just slap that 15% on top of that in terms of the number of units that will be going out.

Great.

And just one other piece of quantification, Lance, is that the units online really represent about 12% of that 15% CAGR that we had before. So, that's the primary driver still of the overall revenue growth.

Okay. And then that's really helpful color. Just back on the supply piece that you mentioned, Oak, I mean, I -- so, for me, I've never been worried about the demand. It seems like the question has always been can you get the parts and the labor, and so forth, to be sure that you can fulfill the demand to get to this 15% -- plus 15% guide? And how are you feeling about that from where you sit today?

Actually, we're feeling much better. As I said in my comments, we have secured the supply for the 1,300; we're feeling confident about that. The issue for us right now, frankly, is we're getting a bit late in the year for people to order more. But we are seeing some loosening in supply, and think that we could actually perhaps ship some more units. We're very close to having everything we need to build more units. But I think given the lateness of the year, that that will actually just help supply for next year. And our supply chain guys, who we sat down with day before yesterday, are quite confident about the guidance I just gave you on the 15% above the 1,300.

Okay. And then just lastly for me, the decision to carry more cash certainly seems prudent given the macro headwinds. But you also mentioned some potential strategic items. And I'm just wondering, are you referring to bolt-on M&A or big new investment projects, or both or something different?

No, we've always said, Lance, that we had a number of strategic initiatives. We were thinking about a lot of them focused on leveraging AVANCE or strengthening our ATG network. We still have some of those in the hopper in terms of analysis and figuring out the business model or whatever partnerships might have to happen to make them work. And so there's nothing really new there. We've said in the past, we have -- we're really not looking at M&A. I think that's still true today. Not saying that some time down the line that wouldn't change. But today, we're not looking at M&A. So, that it's the same considerations that, frankly, that we've had for a while.

Okay, thanks, guys. Appreciate the help.

Thanks a lot, Lance.

Thank you. And our next question comes from Louie DiPalma from William Blair. Your line is open.

Good morning, Louie.

Good morning. I have a question for Barry. Barry, what did you say will be your net cash interest expense for 2023 at the end of the time horizon in 2025?

Yes, what we said, Louie, to provide some quantification of the impact of the interest rates is that we'd expect that to go up about $12 million on an annual basis. So, that goes from $34 million to $46 million in 2026. Based on the LIBOR forward curves, so, certainly that could change, but just going off the July forward curve both the numbers.

Okay. And for that $34 million, is that the net cash interest expense that we should expect for 2023, that's in the $110 million free cash flow?

It's $34 million in '22 and then we expect that to tick up a $1 million or $2 million in 2023, because it's largely hedged based on accounts with that.

Yes, it is reflected in that guide.

Yes, so the $5 million, just to do the quick walk for the change from $125 million in previous free cash flow expectation for 2023, that's reduced by $10 million for GBB. And then, by additional $5 million for the interest expense and we have set aside some additional expense for ongoing litigation with SmartSky carrying into 2023.

Those two are in the five.

Correct.

Great, and for the longer-term 2025, free cash flow guidance, would you say in theory, you raised like the core free cash flow, since you reiterated the guidance, and now you have, I think you just said a $13 million increase in cash interest expense from a floating rate?

While we were still maintaining the view, that will be over $200 million in 2025. So, that does accommodate some additional increase expense and interests, we will begin to see the impact of Global broadband in 2025. I'd point out that the expenses carry through '24 and that, as you can see, they ramp pretty meaningfully from '23 to '24. So, we would expect to see kind of an inflection point increase in free cash flow as we get on the other side of the GBB investment. So, that inflection would begin in 2025. And it's the continuing strength of the core business as these strong unit shipments translate into service revenue. That's a big part of what's driving.

Great. And one question for Oak, if I may, what visibility do you have on the approximate 1,500 in ATG shipments that you are expecting for 2023? Do you need to win more orders or most of those in the backlog?

Not most of them are in the backlog but we have a lot of backlog and frankly, we've got more in backlog than we've ever had before this time of year. So, we feel very good about it. This is based in our conversations now that are going on with dealers in terms of what they're going to order. They haven't put PO's in, but we've got a lot of indications in terms of what they're going to want, especially the big dealers. We're in conversations with them now in the OEM, so it's based on that. That's we don't have firm orders for all 1,500. We would never enter. And in fact, in terms of just to give you a frame of reference, with the 1,300 units, I think we sold out finally a couple of weeks ago, we're now kind of sold out for the year but and we're taking orders for January of next year, but that's in a very strong year. That's when we just closed the book on the year if you will.

Oak, did you imply in one of your earlier comments that the 1,500 ATG shipments guidance would have been higher if you didn't receive that call on Monday or Tuesday from Airspan about the 5G chip delay?

Yes, we think we can mitigate some of that delay because you have to get an L5 box anyway to install 5G. So, the people that are, we're going to be selling L5 boxes in MB13 with the harness kits for the X3 box for 5G add on, but we still just being prudent right now, we haven't worked through all the details, so we felt we ought to take the number down.

Sounds good. That's it for me. Thanks, everyone.

Thanks, Louie.

Thank you. And our next question will come from Landon Park from Morgan Stanley. Your line is open.

Great, thanks for taking the questions, everyone. Just on the Global broadband and the 17% revenue guide, can you just share what specific unit sales expectations you have for the '25 and '26 that are driving the 17% and Hughes yesterday, I think indicated $170 million revenue that are payments that you've agreed to with them covered about 2,000 of the antenna units. Is that correct in terms of what we should be thinking about in terms of the cost of those units to you? And then just one last one on Global broadband, how should we think about your positioning against SATCOM direct and their partnership with OneWeb and their own antenna supplier?

Yes, Landon let me take the first two, and I'll let Oak answer the third one. So, regarding the units, we're not going to get into the unit projections. But what I would say is that the market share projections that we have underlying the revenue, we believe are very conservative, when we look at the overall size of the market and our ability to penetrate that, we have disclosed $170 million in commitments that we've made to use, we have not disclosed the units associated with that, but again, we're comfortable with that level of commitment, it's over a long period of time. And we think relative to what we believe are very conservative market penetration assumptions. That's why we got comfortable making that kind of commitment.

Yes, in terms of competition with Satcom Direct, we compete quite effectively with them today. They're sort of a niche provider at the high end of the market, and a reseller of other people's satellite networks. Very successful company, we have a lot of respect for them. Their antenna technology is different than ours, it has remarkably similar initials, but they don't stand for the same thing. And it's a very different approach. We think our antenna will fit better and be a better option, especially for the medium sized jets on down than theirs. But and they're obviously they're another OneWeb partner. So, I think they will have success, I think we will have success. There's 30,000 jets, and business and turboprops the split between the two of us, so plenty of growth for everybody.

Okay, can you maybe just elaborate in terms of what you're beyond the advanced platform, obviously, just what are some of those key differentiating factors on the antenna side?

Well, there's this made by cast, it's essentially, the approach is very different. Ours is a silicon board essentially, that forms electronic beams across several micro elements, if you will that are embedded in that board and it's flat. Theirs use these little cones, and it's essentially a think of it as a typical array and they are just chopped up in lots of little pieces and flattened out, it's made of metal. It's going to be heavier than ours. And I think it's a little uncertain on the size yet, I've seen different data on that. But we know about from cast on this is that it's quite a bit larger than our antennas. It's not going to fit on medium sized jets on them.

Okay, that's helpful, and then -- Sorry, go ahead.

I mean to say, which is where the bulk of the numbers are in the market.

Well, they have said that they will be able to fit on medium and small right there.

Yes, they said that in a press release that was kind of rushed out at the EBACE convention in Geneva when they saw that we were announcing. So, I would challenge them on that assertion.

Okay. Great, that's very helpful. And then just one last one, I guess on the '23 free cash flow. You wish is that last year you've had some operational outperformance since then, what would -- what should we think about in terms of the limiting factor that didn't allow you to absorb some of that $15 million in additional expense at least partially?

Well, we are basically -- I think you've been pretty clear about what's in that. So, we knew that Global broadband initiative, expenses were not going to be reflected in that. So, we tried to condition the street to understand that that was coming. And so, that is very much in line with what we expected.

So, you might remember Landon that 125 was an upgrade from 100. We'd been saying we were going to exceed 100. And it would have been 25 reflected the improved performance that we had.

But you have had operational performance since even the 125 was issued, right? So I'm just wondering, should we just view, should we view that as conservative or any other factors that we should be thinking about?

But it's also I would just point out, we haven't been through the full blown budget for next year. So, the way our planning process works is we do a forecast update every month, and then mid-year, we do an early look at the following year. So, if this is our first early look, so we just want to make sure as always that what we say we're going to do, we are able to do. So, I think that's always there.

Great, all right. Really appreciate you taking the questions.

Thanks, Landon.

Thanks, Landon.

Thank you. And I am showing no further questions at this time. I'd now like to turn the conference back over to Will Davis for any closing remarks.

Thank you everyone for joining our call this morning. Have a great day. This concludes our call.

Thank you for your participation and you may now disconnect. Everyone have a wonderful day.