Good day, and thank you for standing by. Welcome to the Gogo Third Quarter 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, Vice President of Investor Relations. Please go ahead.

Thank you, Liz, and good morning, everyone. Welcome to Gogo's third 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 Jessi Betjemann, Senior Vice President of Finance, and Chief Accounting Officer. Jessi 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 November 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 third 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. Good morning, everyone and thanks for joining us today. In the third quarter, Gogo continued to demonstrate its ability to deliver record performance in a highly dynamic, macroeconomic and supply chain constrained environment. Strong demand trends like connectivity combined with Gogo's innovative AVANCE platform and strong operational execution enabled us to deliver a very strong quarter. We believe all those factors will remain intact for the foreseeable future and position us to generate growing recurring revenues and robust cash flow for the next several years. A key to our success is our AVANCE platform, which allows us to deliver equipment form factors designed to serve every size business aircraft, all running in the same software and all capable of being easily upgraded to our future 5G and global broadband products. As a result, we're bullish on our ability to retain our current customers and to capture a large portion of the roughly 30,000 business aircraft around the world that today fly without broadband connectivity. Today, I'll focus my remarks on first, our strong third quarter results and updated guidance. Second, the BA connectivity tailwind is helping to drive our growth. And third, our progress on Gogo's key strategic initiatives, our 5G ATG network and our global broadband or GBB project. So let's start with our Q3 performance. We delivered record third quarter revenue of over $105 million, up nearly 21% over prior year, fueled by outstanding service and equipment revenue growth. We're very proud of our production operations and supply chain teams for meeting the surge in demand we've seen this year. We shipped a record 388 AVANCE units in Q3 and now expect to ship more than 1,300 total AVANCE units this year, well ahead of our initial guidance of 1,100 and up more than 47% from…

Thanks Oakleigh and good morning, everyone. My remarks today, I'll start by walking through Gogo's record third quarter financial performance. Then I'll touch on Gogo's capital allocation priorities and finally, I'll finish up with some additional context around our guidance. For the third quarter, our record total revenue of $105.3 million, grew 20.8% year-over-year. Our top line was driven by record service revenue of $75.3 million as ATG units online grew 10% year-over-year and 2% sequentially. As Oak mentioned, increasing penetration of events and leveraging its top line capabilities remains a centerpiece of our strategy both in the North American market where we operate today and globally as we launch our GBB product in the future. The third quarter of AVANCE units online grew by 186 units, up 38% year-over-year and 6% sequentially. As we grew our ATG units online, ATG ARPA grew 3.4% year-over-year to 3,376 as our customers continue to upgrade their plans, including to our high data rate plans, which have been very well received since their introduction in early 2021. The launch of Gogo 5G followed by our GBB product, will further expand our ARPU growth opportunity over time. Now turning to equipment revenue. Gogo delivered a record $30.1 million in equipment revenue in the third quarter, a 43% increase year-over-year as we shipped a record 388 AVANCE units. This is an increase of 47% year-over-year and 25% compared to the previous quarterly record we just achieved in the second quarter of this year. Our excellent supply chain team and ability to leverage our strong balance sheet to acquire inventory is allowing Gogo to capitalize on unprecedented demand for our products. We now expect to ship more than 1,300 total AVANCE units in 2022, representing at least a 47% increase compared to 2021. Our equipment shipment…

[Operator Instructions] Our first question comes from the line of Phil Cusick with JPMorgan. Your line is now open.

Hi, guys. Thank you. A couple if I can. First, I guess Barry, I hear your comment about being more careful with liquidity. But how should we think about capital return from here and maybe discuss the BlackRock share repurchase during the quarter? And then second, Oak, maybe think about the strategic value of Gogo as a standalone business versus potential sale. You had a lot of interest a few years ago. The business is stabilized, the outlook is much better. How do you think about the value of the company in the market today versus what it could be worth in a sale? Thank you.

So let me take the first part of your question. I guess two questions regarding the capital returns from here. So I think we’ve laid out our priorities for capital returns starting with making sure that Gogo 5G is fully funded. We’re in the right place on net leverage ratio, which we’re in good shape on both of those. Thirdly is to make sure we have dry powder to execute on our strategic initiatives, including Global Broadband, and there could be some others. And then we actively consider return of capital to shareholders. So we’re still proceeding down that path with those criteria in mind. We have, as I mentioned, will achieve two of those. We do believe that Gogo has significant cash flow generative capability in the coming years and we would expect that to result in return to capital over time. But again, we just want to be prudent for now. As things unfold and as we see the macro environment unfolding over the coming six months or so, that’ll inform what we do. But that’s how we’re looking at it. We recognize it’s something that is of interest to shareholders, including our largest shareholders, Oak and GTCR. So it’s something that we’re mindful of. On the BlackRock question. Yes, as some of you are aware, BlackRock acquired stock in Gogo exceeding the 4.9% maximum that is provided for in our NOL poison pill as we call it. When we discovered that we with them recognized that they needed to sell down, and as they needed to do that, it provided an opportunistic – opportunity for us to execute on a share repurchase and we felt like it was an appropriate thing to do. It sent we think the right message to the market, which is we very much believe in the long-term outlook here. At a price of $12.23 at the time, we felt like that was a very good investment, and yet it was not such a large amount that it would dampen the objective that we have of maintaining the position.

So, Phil on your question about valuation, I think we are very focused on maximizing shareholder value. Our Board, and I believe that there’s tremendous unrealized value in our current stock price, if you will, and that there’s tremendous runway for growth in this business when you look at the market about 30% penetrated today, and we’re developing products, it’ll give us the ability to address the full global market. So we’re very bullish on the future. If somebody came along and offered us a price that we felt reflected what we think the opportunity is, I’m sure our Board would consider that. But today we’re not actively pursuing a sale and we’re very focused on our strategic initiatives, delivering on 5G, delivering on GBB, and we think that those will drive a lot of shareholder value in the future.

Thanks, guys.

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

Thanks. Good morning, everyone. I was hoping you could comment on 2023. Are you still expecting the 15% unit shipment growth that you were talking about last quarter?

Yes. Landon, we still expect to be in that range. We have the news on the 5G chipset being pushed back to us delivering commercially in Q4 is relatively new news. And so we need – we’ll be factoring that into our budgeting for next year. We also have the impact of the FCC grant program that remove the ZTE equipment. And that’s not factored into our unit count projections yet either. So we’ll give firm guidance on that in our Q4 call, but we still expect to be in that rough range.

Okay. And just to follow-up on the 5G. Are you confident at this point that that 4Q commercial launch is sort of set or is there remaining uncertainty? And I think you mentioned is it 60 units in the backlog? Was that a 5G comment? Or if it wasn’t, is there a 5G backlog number that you can provide? And one final question just on that – sorry, go ahead.

Yes. On that point those are orders for the 5G antennas. The harness for the box that houses the 5g, the chipset and getting the plane fully ready to accept that little box when the 5G chip is done. So those are orders that are 5G orders. Go ahead with the rest of your question. Sorry.

Is that the full 5G backlog or is there another number that we should be thinking about from a 5G backlog perspective?

No, I mean, that’d be the backlog now. But those are people that are putting this stuff in ahead, they even had the 5G done. I just want to make that clear.

Great. And then just one last question just on – sorry, go ahead.

Go ahead.

On just on the competitive side, Starlink has obviously come out with a premium product for their services. How are you thinking about the impact to your business today and the impact to what you would expect for GBB over time and just your competitive positioning against them?

Sure. I’ll go back to the confidence question. What happened with the fabrication of this chip was highly unusual. And this was a really a Samsung problem with their subcontractor around the test mode of the chip. So it’s got a lot of attention at Samsung. It’s got a lot of attention to GBB, it’s got a lot of attention at Airspan and a lot of attention at Gogo. And I’d have to say we appreciate the additional transparency we’ve been able to get from all of those players here since this problem first arose. So given the high levels attention on this and tremendous focus, we’re fairly confident that we’re going to get this chip on time. You can never say that there can’t possibly be a problem. There are milestones in every project and milestones are called that for a reason, which is you got to get past them successfully. So there are a couple key milestones going forward. But at this point, I’d say we’re very confident based on just how well the project’s being managed and how well it’s going. On Starlink, I almost do a victory lap on this. We projected this in Q1 2021 on our earnings call. Then we were asked about them and we said, look, we think that they will come into the market with something that goes after the high end of the BA market because they’re very focused on commercial aviation mil/gov. They’ll be designing a relatively large antenna that that works in those markets and would work in the high end of the BA market. And so that’s what they’ve done. They’ve set a real premium price and looks to us like they’re really going after competing with the geo satellite providers that that serve business aviation today.…

Great. Thanks for that context.

Thank you. Thanks, Landon.

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

Hey, good morning. Thanks for taking the questions. Oak, if I could dive in on the 5G front, it’s nice to hear that you’ve got some confidence around the timeline now the third and fourth quarter of next year. But I wanted to delve in, I think you talked a little bit about STCs and line fits on that front. I wonder if you could dive into that a little bit more in terms of the development on that front. Kind of what you’re also seeing from a competitive landscape standpoint in terms of the delays of 5G. Is it having an impact on demand? And then I wanted to clarify, I thought there was a comment around some lower revenue related to 5G. If I recall correctly, I don’t think there were big numbers built into 2023 and most of the AVANCE units in general are able to support that upgrade path. So I’m just – I just want to make sure I understand the comment in terms of what you’re seeing out into 2023 at this point. Because it sounds like you’ve got pretty good demand, I’m not sure what the coverage is for that 15% growth in 2023.

So I think we were talking about STCs that was your first part of your question.

Yes. Competitive landscape as it relates to any of the delays there. Is that causing additional problems? And then really kind of your prior expectations for 5G in 2023, I know AVANCE again is, right, it’s future proof upgradable. So is that really having any sort of a material impact in terms of how you guys review? And it’s certainly the second half of 2023.

Yes, so I’ll start with STCs. I mean, we have our STC and PMA for 5G today, we will have to do a minor amendment when we get the new chip. Today that box has a 4G chip in it and we’ll have to replace that chip with a 5G chip that is an amendment that will be not an issue at all. That’s really no change at all. So it should not be an issue at the FAA. We have dealers who have already done STCs and installed, were installed on Russell Wilson’s aircraft and that was done with an STC for that type of aircraft. So we have lots of STCs that are all sort of waiting for that final 5G chip amendment at the last moment. So I think we’ve probably got about 30 plus STCs either in works or very close to complete and waiting for the 5G chip. So yes, moving into production with STCs is not going to be anywhere on the critical path in terms of commercial launch. We don’t see any impact on sales today of the delay in terms of competitive inroads that’s the market’s basically just the same as it was a quarter or two ago. What we see that’s great is in order of backlog next year and dealers – our big dealers place their orders for the next year around this time of year. And what we’ve seen so far is a pretty nice growth in those orders, the size of those orders. So we’re feeling very good about that. The OEM bookings come in a bit later, so we don’t know exactly where that will end up. So we’re reserving judgment there because there would’ve been some 5G orders in that that. The risk is the planes that you miss that went in for maintenance, they go in for a major maintenance event and would’ve had 5G installed. They might already have L5, in which case we don’t have a sale opportunity or they might just put in L5 and wait. L5s have lower price points than 5G product. On the OEM side, again, you get cut in on line fit, you don’t want to miss that. And potentially, they impact when we get cut in at certain places. So I’m not saying we are, but these are all things we’re working with the OEMs and dealers on right now to assess the impact.

Perfect. Very helpful.

Your question around the impact on 2023 revenue, I think the way to think about this, there are really two factors to consider. One is how many current L5 customers upgrade to 5G as we launch, and then separately where new customers do. So we do expect to see equipment revenue particularly impacted by the delay, which we would’ve seen ramping during 2023. So that will impact the revenue. We have accommodated that in the combined guidance that we’ve given on cash flow for years 2022, 2023. On balance, we expect L5 to continue to be the most widely – widespread and sale product by the OEM partners. And so we don’t expect to drop off an L5 sales in the near-term, do the 5G launch. And L5 will continue to be the best option for many customers, delivers fast arrival connectivity and the option to upgrade that Oak talked about and so on. But over time, we saw this certainly ramping, but even by the end of our planning horizon that we saw 5G on the order of 20% of units online. So it’s a very attractive product.

Great. It’s very helpful. And lastly, if I could just to follow up on the rip-and-replace program, I know a portion of it about a third has been approved by the FCC. I'm not sure what the – could you update us on the timeline of when you would expect to hear back on the additional allocation and it seems, this is more of an upside opportunity than anything else. I just want to clarify how that swings or impacts your OpEx or otherwise CapEx in terms of if the FCC approves the additional $3 billion to go to the rip-and-replace program. Thanks.

So I'll address the timing questions and all that, and I'll let Barry handle the hard part, which is the impact on the accounting next year. So to be clear, the FCC has approved us for the $330-some odd million. The FCC program is underfunded as the issue. They had projected $1.9 billion in total grants when the bill was first going through Congress. The applications that came in significantly exceeded that. They cut lots of them back because parts of them didn't qualify. But even after cutting them back, the 1.9 billion only reflected, I don't know, 39% of the total number of approved grants. So they've been working with Congress. There were two bills in Congress ended up being very similar, a Senate bill and a House bill. House bill was approved by the House Senate bills in committee but there was broad bipartisan support for the bill. And there were letters written by, I think 36 senators signed a letter, for instance, and the – it was an unlikely grouping, had Chuck Schumer and Ted Cruz signing the same letters, kind of unusual, right. So there's broad support for the bill, which is good. But that this Congress ends when the new Congress comes in in January 3 and you if it's not passed by then it would be a do over. So we're very hopeful that it will be addressed then, by then. And I think it – we could get probably well, but this is Congress, so it's very hard to predict, exactly what will happen or what will divert their attention. So timing is hard to predict.

And on the financial impact, Scott, it will certainly be a net cash flow benefit to Gogo, if the funds are allocated at those higher levels. As you know, the initiative to remove ZTE equipment was always in our long-term strategic plan, but it was under a much longer timetable with standing well beyond 2026 planning horizon. So those costs were originally captured as part of our ongoing maintenance CapEx and spread across those years. And the purpose of the program, of course, is to accelerate that timing through remove Chinese equipment so as that happens, we would be reimbursed for that. So it's too early to talk about the real cash flow impact of that. But in general terms, kind of the puts and takes are is that we would probably have to make some investment up front and inventory and so on and then we would get reimbursed for that later. So there could be some negative, but on balance it's going to be a positive. We'll certainly provide that more detailed outlook if and when that gets approved at the higher levels.

Great. Thanks so much. Nice quarter,

Our next question comes from the line of Louie DiPalma with William Blair. Your line is now open.

Hi, Louie.

Hey Oak, Barry, Jessica and Will. Good morning.

Good morning.

Oak, what is the timing for aircraft flying with the new NB13 combo, the 4G, 5G antenna?

Well, there's one flying today with the NB13 antenna in it. Russell Wilson’s aircraft came down to the NBAA convention, fully fitted with the 5G system minus of 5G chip. And dealers – and yes, I'm sorry, dealers are installing, there's six – sets out there right now, which dealers are installing minus the small box that holds the 5G, air card with the 5G chip on it.

Great. That's exactly what I was looking for. And my next question where should we expect the AVANCE penetration to settle out and are there a significant number of Gogo classic customers that are satisfied with their existing performance such that they probably won't upgrade to the AVANCE system?

That's a great question and the answer is there are – today we're about 45% of our install bases is AVANCE. And 55% is still classic. We see steady migration, but there are customers that are happy with what they've got with the classic product when you're going to see an upgrade there is when they go to sell that aircraft. And generally, people these days have to solve a better connectivity service to sell the aircraft or the new owner will put in an improved system. So, aircraft turnover every seven years roughly and so there's certainly some that could be on the classic product for quite a while.

Got you. And one final one, this could be for any of you, if you were a sell side analyst such as myself or even a buy side analyst, how many aircraft would you project for the industry at the end of 2024 would be live with a LEO broadband satellite product for the business aviation industry?

That's a great question, Louie. It's not going to be 100s. It's going to be probably under 100 by then, but I think it'll be ramping up rapidly the next year.

Yes. And the reason I'm asking is in your comments, you were talking about how you see, there being demand for the startling service as – there probably will be. And I was just wondering what your expectations are, for that and potentially others that may come after Starlink and how that fits into your long-term plans?

Yes, I mean, I don't – I'm not sure you're quoted me exactly correctly. I said I think that their model might be appealing to some customers who are do it yourselfers. You can go on their website and you can reserve the system. You don't know when you're going to get it, and there's no STCs yet. They say they're working on a bunch of STCs, And then, you're going to find an installer. It's not clear if they're going to have an installation manual. I mean, there's just so many things you don't know yet about what Starlink is doing that it's kind of hard to predict. I think that it's competing with a GEO satellite product that's very, very expensive at a price point that's right around the same as the GEO. And it's going to provide a significantly better service than the GEO. So, I think that there are going to be people have lost plenty of money who are going to go for that and would install it. The question is when and it's very hard to get on these jets. The timing of doing something like that's a big antenna. I mean, it's a really big antenna and it has some challenges. It has this mounding plate that's quite high and it's going to require decompression and things like that. There's a lot of complexities in what they've done that, that we're not running into based on our design, but, that all can be overcome. But to me it means it's going to have to be installed in a major maintenance event. And that happens every three years, let's say with a big aircraft. So you don't get at them that often.

Understood.

And before anybody's going to order it, they're going to make sure there's an STC for what they're doing, et cetera. So it's going to take some time. And it remains to be seen, how the competitors will react. How will [indiscernible] react to what Starlink's doing. So that's all very hard to predict. I would say right now, the GEO satellites, there are about 1,600 roughly aircraft in the world that have GEO satellites product on them. And that's been available for a long time. So, I'm not sure that this is cutting so much new ground that there's a whole new segment out there that's all of a sudden going to want satellite. It's probably going to replace GEO, I would think in most instances. It's a very different setup. The GEO satellite products all are up in the tail. This is going to be mounted on the fuselage and it's a pretty large item going on the fuselage, so a lot to be seen there. It's nothing – nothing's going to happen lightning fast. There's a great man over at Duncan Aviation who I quote often on this, he says, business aviations where things go to slow down and I think he's right about that.

Thanks Oak. Very eloquent.

Our next question comes from a line of Ric Prentiss with Raymond James. Your line is now open.

Thanks. Good morning everyone. Jessi, looking forward to hearing more from you in the future in early 2023, but Barry, do we get you one more time?

Well, I'll still be here through the call, so we'll have to decide whether Jessi's better or I am, but I'll be around through that.

Yes, we’ll get those caves out there too, right. Question, I want to follow up on some of the other questions. The 17% long-term revenue CAGR, what's the split between like units sold, driving product revenue versus ARPA increasing with the different service plans out there? And has that changed at all given the chip delays?

Yes, I don't think the chip delay really affects that mix, Ric, as you look out there to break it down a little bit, so we'd had 15% compound annual growth rate in our model prior to announcing GBB that added the two points additional when we saw that with those sales beginning in 2025, the lion’s share of the split is coming from increased units online. About 13% of that is from URL. The balance is from ARPU. So it really is driving more penetration in units online as you know, that's where the opportunity of this market, overall being just 30% penetrated. And on the ARPU side, we see it going up for a couple of reasons and then muted for one reason that expected to go up as people will take, have higher data rate plans, which they're interested in to have a more living room like experience. Secondly, as we add 5G and then GBB, that will drive ARPU high side. The muting influence on that will be as we get down into the general aviation market a bit more if you don't have as high ARPU. But frankly, what matters ultimately is the revenue per megabyte and that those are still very attractive unit economics when we get that.

I appreciate the color on the interest rate potential for mid-2023, sounded like 13 million additional interest – 37 million goes to 50 million, I assume that's for a half year impact. So obviously a full year impact would be more than that. Is that factoring into Phil's question on the return on capital? Are you going to be watching, is the calculus at some point, I think you mentioned it even that maybe there is pay down or buy down debt, that's a better accretive value of free cash flow and free cash flow per share. And how should we think about the timing as you look at that?

Yes, just to clarify the point about the $13 million increase, that's an annual cash interest expense that is between now – that is the 2026, so it goes from the $37 million today to $50 million based on the forward curve as of October. So that's really the impact of that the longer term on interest rate. So just to make sure we're talking about the same thing here.

That's an annual effect, not a happier effect.

That's correct. Yes, it's an annual effect in 2026.

Based on October rates? Go ahead, sorry.

Does that answer that part of the question?

But then kind of the calculus as far as how you look at buying down debt or?

Yes, that's the impact in 2026, correct.

Just want to make sure not in 2023.

And then the impact of, on all this, kind of our thoughts about debt pay down, it does inform it. If we were in a low interest rate environment, we would be having different conversations and we'd be thinking about it a little bit differently. So we tend to be pretty conservative as you know. There is a more interest rate exposure. Again, we think it's pretty managed, but the interest rate caps, for example, step down from $650 million to $525 million is the next step down. So that happens in 2024. So they do step down over time, and so there is that exposure, but we're just, we want to keep some dry powder for this as well as for other things that we might do opportunistically, it's great to be able to have that flexibility with a share buyback in September, for example. So yes, it does influence us, but over the long-term, I think the cash generation capability of the business is such that would swap out those interest rate issues because of that.

Makes sense. Last one for me, you kind of alluded it to it there. You talked about potential for other strategic initiatives keep dry powder for global broadband, and there could be others. It was mentioned in some other places that there could be some other strategic initiatives. You probably can't tell us a lot of what those are, but conceptually high level, what would make sense philosophically to say might be interesting to bolt on to the Gogo go-to-market kind of offers?

Yes, I mean, we've always said that we're always looking for ways to improve the performance of our ATG network. We think that a large part of the market will stay on ATG for a long time. We have good economics there, and of course, we make improvements in terms of capacity and what we're delivering there that will prolong that life. So I'd say they're mostly in that arena. We do look at other opportunities in terms of bolt-ons or other types of things. We don't have anything in mind right now, so I'm not going to get out on a limb on that one. But I think the main focus would be the improving ATG.

And is there any need for more spectrum? Is that something that might be looked at as well?

Well, spectrum is something I never talk about because it only leads to trouble. So I'll delicately dodge that question.

Elegantly, yes.

Yes.

All right. Thanks everybody. Just look forward to hearing you on the next call.

All right, thanks.

Thanks, Rick.

That concludes today's question-and-answer session. I'd like to turn the call back to Will Davis for closing remarks.

Hello everybody. That concludes our third quarter earnings call. Thank you for your participation and we look forward to speaking next quarter. Thank you. You may now disconnect.