Thank you for standing by. And welcome to the Gogo's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. As a reminder, today's 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, Valorie, and good morning, everyone. Welcome to Gogo's fourth quarter 2022 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; Barry Rowan, Executive Vice President and CFO; and Jessi Betjemann, who will assume the role of Gogo’s CFO on March 11, 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. And 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 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 February 28, 2023. 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 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 good morning, everyone. Thanks for joining us. Our 2022 fourth quarter capped off a great year for Gogo. We exceeded our growth expectations and positioned ourselves for continued long term growth and value creation. Our industry is seeing seismic shifts in demand coming out of COVID. Thanks to our talented Gogo team and strong operating infrastructure, Gogo stood atop the avionics electronics industry in its ability to scale and meet that demand. We expect those demand drivers to continue and we'll continue investing in improving our products and services to meet that demand and maintain our leading position in the business aviation in flight connectivity industry. As I mentioned, 2022 was a very busy year. Together the Gogo team achieved a lot and released the 1.5 million flight milestone on our AVANCE platform since launch in 2017, cementing its position as the most successful broadband product launch ever in business aviation. We completed the multiyear simplification of our capital structure and reduced our net leverage ratio to below our target of 4 times in connection with the conversion of our final outstanding notes. With net leverage of roughly 3.1 times at the year end and with ample cash on the balance sheet, we're well positioned to execute on strategic initiatives that will ensure our long term competitiveness. We adeptly managed supply chain in a year of strong demand and weak supply. And many dealers tell us we were the only avionics company able to meet their demand last year. We shipped more than 1,300 total ATG units, an all time record, up more than 50% from 2021 and more than 20% above our additional guidance, all of which we believe will drive a record increase in aircraft online in 2023. We completed the 150 tower bill for…

Thanks Oakleigh, including your very kind words, really appreciate that. Good morning, everyone. We are very pleased with Gogo's performance in 2022 as we set new records both operationally and financially. Our performance demonstrates two foundational elements to Gogo investment thesis. First, we have proven our ability to deliver strong financial performance, even as we've undertaken significant strategic investments, including Gogo 5G and our Gogo broadband product. Looking ahead, we will continue these investments in 2023 and 2024 as we advance our technology and execute other operational initiatives to maintain our leadership position in the growing and underpenetrated business aviation in-flight connectivity market. We expect our free cash flow to accelerate substantially beginning in 2025 as we get these major projects behind us. Secondly, our ability to achieve these results is a testament to the strength of our underlying business model and financial position. In 2022, we met unprecedented demand for our equipment in the face of significant worldwide supply chain challenges. As these units are activated these aircraft online produce recurring high margin service revenue that is sticky and is the engine of our strong cash flow. And further, our strong balance sheet provides the flexibility to invest in our business for the long term while delivering for customers and shareholders today. The 2023 financial guidance and long term targets we announced this morning underscore our confidence in the business and our strategy. Before we discuss these in more detail, I'll walk you through our fourth quarter results. For the fourth quarter, our record total revenue of $108.2 million grew 17% year-over-year. Our top line was driven by record service revenue of $77.3 million, up 12% year-over-year and 3% sequentially. As we have said, increasing AOL and particularly the penetration of our AVANCE products is the centerpiece of our…

Thank you, Barry. It is a pleasure and a privilege to join you all this morning. While I've been behind the numbers for several years and have engaged with many of you on the line previously, I'm looking forward to getting to know you better as I move into my new role. I'm going to provide a brief update on our capital allocation strategy and then provide some context to the 2023 guidance and long term targets we announced this morning. We are pursuing a balanced capital allocation strategy intended to further our strategic goals and enhance shareholder value. We are focused on four priorities; first, maintaining adequate liquidity; second, investing in strategic opportunities to drive competitive positioning and financial value, including 5G and GBB; third, maintaining an appropriate level of leverage; and finally, returning capital to shareholders as appropriate in the future. Given the rise in interest rates and the current volatility of the financial markets, you can see that we are taking a more conservative approach to our balance sheet. A higher cash reserve provide us with the optionality to evaluate potential new strategic investments and preserve strategic and financial flexibility. In addition, we have previously stated our goal of maintaining a target net leverage ratio below 4 times. We ended 2022 with a net leverage ratio of 3.1 times. Looking forward, we are planning to maintain net leverage in the range of 2.5 to 3.5 times. Our strategic considerations also include the potential to pay down debt in the future. We will continue to evaluate returning capital to shareholders in conjunction with our ongoing assessment of financially attractive strategic investments in the context of the fluid macroeconomic environment. Now, I'll turn to the guidance and long term targets we announced this morning, starting with some additional color…

Thanks so much, Jessi. Before we open up the call for questions, I would like to take this opportunity to express my appreciation to Oak for your truly exemplary leadership, to Jessi for stepping up as you have, to Will for your partnership with the street, and to the entire Gogo team for your incredible support. As you know, I'll be closing a chapter of my professional life in the coming weeks, which has spanned 40 years helping build or turnaround technology driven companies, including nearly six years at Gogo. I may be retiring from Gogo but I'm not retiring from life. I look forward to this next season, which I expect to include serving on boards, contributing to the floor and investing in the next generation of leaders. Gogo is in outstanding position to achieve its significant potential for value creation through enriching our customers’ lives and continuing to contribute to society along the way. It's been an absolute privilege to be a part of Gogo's transformation in partnership with our highly innovative and energized team, you are truly the best. I'm also proud to pass the baton to Jessi who’s more than demonstrated her confidence, leadership and outstanding business acumen during her years at Gogo, plus she's a wonderful human being. I look forward to cheering as she open the rest of the leadership team guide Gogo into the right bright that lies ahead. Operator, this concludes our prepared remarks and we're now ready for our first question.

[Operator Instructions] Our first question comes from the line of Ric Prentiss of Raymond James.

First Barry, I think our time together spans almost 20 years from all the different places I've covered and you've been at. So it's been a true pleasure working with you as well. So congrats on the next phase of life. And Jessi, glad to be working with you in your new role as well. First question is, Oak you talked a little bit about competition and how you think you guys shape up versus others that might be out there now and in the future. How should we think about what the '23 guidance and the long term guidance assumes as far as competition from whether it's LEOs or air to ground or other GEO type people, what's kind of baked into that? And it sounds like you want to be available to be very competitive in pricing, but how do we think about how competition is factored into this guidance?

So I think, you all know Starlink is entered the market at the high end, I would say, they came in with a large antenna aimed at competing with GEO satellite providers, doing the heavy JAXA segment of the market. At a pretty -- I think a price that's competitive with GEO, but a lot higher than our pricing. I think that there's going to be huge changes in the competitive landscape over the next couple of years, by virtue of the LEO entry and of course, we hope to be a driver of that, disruptor not to disruptee. And I think that's going to have a pretty significant impact on GEO providers. So from our perspective, we see ourselves accelerating revenue growth with the launch of the GBB product now in '24, accelerating revenue growth for 5G starting in -- well, the revenue goes from GBB will be '25 on, revenue growth from 5G will be '24 on. And so we think we compete very effectively. In terms of competing with Starlink, their product is installed on some aircraft, we've talked to people flown that and we kind of understand what their speeds are. And frankly, our speeds of GBB will be very competitive with those speeds and they'll be increasing their speeds over time and we'll be increasing our speeds over time as one OneWeb launches Gen 2 and we progress that partnership. So we think on a product quality sort of pure basis we're competitive. And then when you look at all the other things that come into bear in terms of what it takes to win in the business aviation market, we think we have a real advantage. First of all, customer service is hugely important in our business. It ranges from engineering support, to billing support, to everything, and people expect very high levels of, what we'll call, white glove service in our industry and we're very good at that. We can afford to spend a lot of money serving our market, because of our scale in the vertical market. We have by far the largest share in the market and we generate a lot of cash flow out of the market, which enables us to invest in all the different elements of sales, marketing, support, engineering, et cetera, that it takes to really understand and deeply sort of integrate ourselves into the BA market. So we feel the big advantage there. We have 30 years of building very deep relationships with all the OEMs. We have contracts with all the OEMs, which are hard to do. We have 120 dealers and very deep relationships there. And we have deep relationships with the big fleet operators and with thousands of owner operators. So I think we feel that we can be very, very competitive and we feel good. And we've factored all those factors that I've mentioned a moment ago into our plan.

And specific to the initiatives, should we assume that most of the GBB spending goes into EDD, and that the operational initiatives also go into kind of the EDD line?

So most of that spending, as we mentioned with GBB now 95% is going to be OpEx and that will be all in GBB -- all in EDD. And yes -- but the operational initiatives as well as predominantly in EDD.

And final question. Any update on the lawsuits, what's going on, on the patents and the court case, I know you said I think came in lower cost than you thought in the quarter maybe?

There's a lot to update there. So first of all, I just want to repeat, we do not infringe on these patents. So I want to be very clear about that. And I'm also not going to comment on our litigation strategy or the case itself as I don't want to taint our litigation. But let me go through where things stand. So SmartSky, originally filed a patent suit against us of our own four patents. They've just added -- they've just filed with the court requesting to add two new patents. Those two new patents are essentially additive to existing families of patents that were already part of the suit. So three of those patents, there are six patents and all right now I believe, and three of those patents expire in August of 2025 and the other three expire in 2034 and 2035. There are two prongs of the litigation right now. One is the original infringement complaint and the other is the request for a temporary injunction, and I'll just cover each of them. The infringement -- I mean -- the injunction application, the judge at the presiding judge over the Maine trial, decided against SmartSky on that and did not grant a temporary injunction. They've appealed that that's in the federal district court, and that court can either essentially remand the case back to the original judge, saying that there was no abuse of discretion, which would be the standard that they'd have to apply and then the original judge would have to deal with that and either change his mind or confirm his original denial. If the district court did not find that there was an abuse of discretion then the ruling against SmartSky on the temporary injunction would stand. The original case, the presiding judge has now scheduled trial for April 25. And like I said before, I do not believe, we do not believe, we infringe. But I want to be clear that if the judge ultimately found in favor of SmartSky, the overwhelming remedy is that there would be some sort of licensing agreement, the SmartSky sort of try to referred in their recent release, there could be a permanent injunction against us to prevent us from selling our 5G product, that would be highly unusual. And I would also note that the patents that are expiring, of course, any decision by the court there would, A, be fairly limited in terms of what the fees might be, because those patents will not be around very long after the case since the trials April 25 and the patents expire in August of 25, and I think that's about it. Any follow-up on that Ric?

No, I think that's clear. We'll just keep our eyes on it. Have a good time. Look forward to seeing Jessi and Barry down for one final swansong in Orlando next week. Everyone, stay well.

Yes, we managed to keep Barry, we hung on to him for two weeks. So that he can attend your conference…

Our next question comes from the line of Scott Searle of ROTH.

Barry, I'd like to add my congratulations, best of luck going forward in your new endeavors. And Jessi, congrats. I look forward to working with you going forward. Maybe to dive in on the guidance for this year, right, we've got some elevated OpEx as a result of 5G pushing out from '22 to '23 on top of that investment cycle for GBB going up this year. I was wondering if you could extrapolate that into '24, right? 5G should start to come down, but I think the GBB cycle continues to increase a little bit. How we should be thinking about that? And also in terms of the guidance this year. I wonder if you could clarify how you're thinking about equipment gross margins? I think you've talked about possibly being a little bit more aggressive, if need be, where gross margins could be under 30%. What do you guys kind of factoring in at the current time in that guidance?

So for 2024, as we mentioned, '23 and 2024 are investment nearest for us. So we will have the remaining spend, it's going to be around the $30 million to $35 million for the remaining spending GBB in 2024 and that's predominantly OpEx. We will -- that's going to get offset as we see some of the 2022 shipments are coming online in '23 and will continue to be providing service revenue in 2024, but it still will be an investment year. With regards to the equipment margins, that's right. So as you noticed our long term targets for the adjusted EBITDA did come down slightly and part of that is reflecting the lower equipment margins to be able to grow our units online and support the advanced penetration strategy that we have. Also included as part of that is continued funding in ED&D, so that we can remain competitive in the outer years where we’re being cautious in that and being able to keep that level of innovation going forward.

And I might just add that on the average sales price, to remind people, we've often talked about going down market as well as that market. And part of this, I’ll call our segmentation strategy here is also going down market and penetrating down market. And as you go down market, the markets are more price sensitive. And so we sort of factored in some increased promotions or some price reductions on what I'll call more value oriented advanced form factors down market.

And I apologize if I missed this on the call. But did you give a unit number that you're targeting in 2023? And then lastly, if I could, on the ARPA front, you've done pretty well on that front, I think, over the course of '22, it's going up. A lot of moving parts, moving down market, plus you've got more unlimited plans and your 5G coming in to the back of this year. Given the current backdrop, if I look at some of the BA data in North America, utilization is flat to maybe down a little bit, still under penetrated, right? So you're growing overall units and connected aircraft. But utilization is going down a little bit. I'm wondering, is that having any near term impact on ARPAs in terms of how you're seeing for utilization, or are customers moving towards higher end plants? And how do you expect 5G to impact that as we start to get into the back of this year and into 2024?

By utilization I'm assuming you mean aircraft utilization, not network utilization, but our network utilization is way up. Aircraft utilization and frankly, I think on Gogo equipped aircraft is up slightly. But yes, the trend is sort of leveling off. And then [Indiscernible] that looks just like it’s kind of a plateau the demand for lift, but that demand is still way over where it was in 2019. And that's the structural change in the industry that's driving IFC demand, because 70% of their planes don't have anything and the people selling those aircraft, there's more demand now for IFC, given all the changes I talked about in my script in terms of the demographics and the applications people are using, et cetera. In terms of the impact on us have a slight decrease in flight count, industrywide, really not much impact. And that's for that same reason, there's just so much of this market that's unpenetrated and there's demand in that large unpenetrated portion of the market. So we don't see any impact there. I would say it's -- ARPA is not a major driver of our growth, unit counts are the main driver. And like you said, Scott, 5G will push things up a bit, going down market, deals like we have with Cirrus and others will pull it down a little bit, then ultimately GBB will push it up a it. So all these things are going to play out and that's why we don't project very large ARPA growth through the planning cycle.

Our next question comes from the line of Lance Vitanza of Cowen.

Thanks very much for the information thus far. Barry, congratulations, it's been a pleasure working with you. And Jessi, I look forward to working with you as well. I wanted to sort of focus on the long term targets. The revenue and free cash flow targets, since you've introduced these longer term targets have been consistent, fairly consistent, thankfully, but EBITDA margin target seems to be bouncing around a bit. And I think first it was 45% in 2025 and then I think it was approaching 50% by 2026, and now it's down to 45% by 2027, I think. So just wondering if you can comment just at a high level on what's going on there and should we expect this target in particular, could remain volatile? And then I have a follow-up as well.

I don't really view bouncing between 45% and 50% as being extremely volatile -- approaching 50, I should point out, as Jessi says. So yes, we did guide that, so 48, that was approaching 50. Maybe we're just below 47, it's 45% range. So we think those are all very healthy EBITDA margins to begin with. Second of all, I think there are two things over the course of the LTM that are impacting that. First is what I just mentioned around the average sales price on equipment. We have been introducing smaller form factors that go down market and those be priced at lower prices and they will be competitive because we want to [indiscernible] penetration down there with AVANCE platform. So that's a bit of a drag on equipment margin in the out years ago, so brought things down. And then frankly, we -- it's very hard to predict exactly what's going to happen in the competitive environment. We talked about it. Obviously, Starlink entered at the high end of the market, we don't see a lot of progress there, but they have entered. And the way we thought about that is we may need to invest more in engineering in the out years. So we've beefed up our ED&D spend even though we don't have main projects for some of that spend right now, but this was kind of a placeholder to manage expectations. So that's the other [product].

And just to add to that though, we want to make sure that you understand that we are planning to have significant operating leverage, because of operating expenses as a percentage of revenue. We're expecting that to decline approximately 15 points from 2023. And also, we really want to focus on the absolute EBITDA generation and not just on the margin. As you noted and we've been pointing out, we've been very consistent on anchoring around more than $200 million in free cash flow, a target that we set over two years ago. So when you look at that -- and then also over the latter years of our planning period, the free cash flow conversion is approaching almost 90%.

And that actually ties into my follow-up, which is just trying to get a better sense for what might be happening below the EBITDA line. Given that there has been a little bit of a reset on the EBITDA margin and yet the free cash flow has been holding in firm. So is that -- I mean, I can't imagine that it's interest expense, but perhaps you're seeing some advantage, some better performance in terms of cash taxes, CapEx or working capital?

Yes, as we’ve noted with our net operating loss balance that we have, we don't expect to pay meaningful cash taxes until the end of our planning period, but also with regards to our CapEx. So after this year, we're really going to see a decline in that CapEx and that's why you're going to have that high turnover to free cash flow in 2025 really have that step function and then going forward.

And we also have one project hitting OpEx right now within than CapEx.

Our next question comes from the line of [Lenin Park] of [Indiscernible].

I just wanted to follow-up on the long term revenue guidance. I was just wondering if you could disaggregate that between service and equipment for us, and to better understand how those two elements are playing into it? And then I just had a couple of follow-ups on the back of that.

In terms of revenue mix, are those service revenue. The equipment as a means to service revenue, that percentage in out years I don’t have the figures…

We haven't provided that. It's mainly being driven -- you're going to have that stronger growth in service revenue…

So service revenue will be about 17%?

Yes, it's going to probably be more.

And then when -- I was just wondering if you could just on the penetration rate that you guys see. Can you maybe unpack that in terms of what is the penetration rate at the sort of the large cabin aircraft, and how does that change as you get down into the small jets? And what do you think the realistic targets are for those different aircraft sizes over time? And then Jessi, just one last one for you, on the $30 million in strategic and operational spend this year. Can you just clarify, if we look at that bucket as a whole, what was it in '22? And then as we look at '24, what did it look like in 24? I know you talked about the GBB spend for '24. But just the other elements as well as if we could just get an apples-to-apples on that $30 million bucket?

So I'll start with the segments and then Jessi can mention the financial question. About half the heavy jets in the US market have in flight connectivity, today about half the medium sized jets down in the mid 20s on the light jet and it's very small on the turboprops. So we see frankly plenty of room to grow in all those jet sized segments, if you will. And globally, it's even more dramatic. I think 95% roughly in the market doesn't have connectivity today. There are a couple of thousand heavy jets on which, I don't know, either 900 I think have connectivity roughly. The rest of the market, frankly doesn't even have an IFC product that's available to them in terms of broadband IFC. So medium size jet run down overseas have nothing in this space in open territory.

And large jets are what in the US? Large jets, did you say penetration rate for this?

Yes, I did. I said heavy jets about 50%.

And then as far as the $30 million spending, [Lenin] the -- for 5G, we spent about $2 million in OpEx this year and GBB $4 million. So the 5G as mentioned is going to increase -- will be $9 million and GBB is around $14 million this year. And then for next year, the GBB is going to be the bunch of the spend, around $30 million, $35 million to which kind of the aggregate of $50 million in total. And then in terms of the other operational initiatives, it's probably going to be somewhere in the range of $5 million to $10 million next year.

Our next question comes from the line of Louie DiPalma of William Blair.

Barry and Jessi, I am sure both of you will do great on the next phases of your respective careers. Starting off, global broadband is obviously critical for Gogo's future. Oak, what caused you to expedite your planned launch timing for the GBB service? So typically, projects in the satellite industry are delayed often by several years but for GBB, you pushed it forward. So what's behind that?

Well, we have good partner who's got really mature development processes and manufacturing processes, and I think we've been very organized as well. And frankly, OneWeb has really pitched in and it's been a great working relationship. So we started with a late ‘24 early ‘25 kind of target. We do have some incentives built into our contracts to accelerate that. And Hugh’s responded to that and come up with ways to get the intended done sooner. And we will continue to work on other ways that might speed it up further. Time is of the essence for us in this and we really want to get to market as fast as possible.

And one on the financial side, either for the new CFO or the old CFO, but in terms of the 2025 free cash flow target. What does that assume for maintenance CapEx and interest expense?

In 2025, I think by that point in time, our CapEx is going to be sort of in that maintenance range. So it's around $20 million for maintenance CapEx. And that interest expense, obviously, it depends upon the forward rates and what happens with regards to that. But it should be -- depending upon where we are with the interest expense somewhere in the range of $30 million to $45 million in interest expense depending upon what happens with the rates, probably $40 million to $45 million.

And that is our time for questions today. I'd like to turn the call back over to Will Davis for any closing remarks.

Thank you, Valerie. And thank you everyone for joining the call. This concludes our fourth quarter earnings conference call. Thanks very much. You may disconnect.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.