Good day, and welcome to the First Quarter 2023, Gogo Inc. 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] Please be advised that today's conference is being recorded. It is now my pleasure to introduce, Vice President of Investor Relations, Will Davis.

Thank you, Andrew, and good morning, everyone. Welcome to Gogo's first quarter 2023 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; and Jessi Betjemann, 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 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 3, 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 will 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 good morning, everyone. Thanks for joining us today. I'll focus my remarks on three main areas. First, I'll provide a state of the business aviation industry as seen from Gogo. Second, I'll provide key highlights of Gogo's first quarter results; and third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jessi will then walk through our quarterly performance and 2023 outlook before we open up the call to your questions. So let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre-pandemic period, driving excellent new installation numbers for Gogo, which we expect will translate into high-margin current service revenue, the primary driver of Gogo's long-term value creation model. The dealers and OEMs are still navigating some supply chain and labor laws. The avionics industry is in the midst of a return to normal operations, though at higher levels, as I noted a moment ago, and with some bumps still on the road. For Gogo, that means dealers are returning to normal order patterns due to the extended lead times induced by COVID and fear that supply may not be available at all, many dealers ordered more equipment than they had immediate need for over the past two years, culminating with our record setting Q4 2022 shipments. Fortunately, for Gogo, our great production ops team was able to meet that demand. However, as lead times have come down, dealers can use current inventory for new orders and don't immediately need to backfill for those installs, which is why despite having our second best new install quarter ever, we do not have as much equipment revenue to show for those installs as we…

Thanks, Oak, and good morning, everyone. Gogo continues to generate strong financial performance even as we've undertaken significant strategic investments like Gogo 5G and our Global Broadband Product or GBP. This is a true testament to the strength of our underlying business model and financial position. In my remarks today, I'll start by walking to Gogo's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet and capital allocation strategy, including the paydown of debt we executed today, and I'll finish off with some additional comments on our 2023 and long-term outlook. Total revenue of $98.6 million in the first quarter grew 6% year-over-year. Our top-line was driven by record service revenue of $78.5 million, up 11% year-over-year and 1% sequentially. Our ATG aircraft online reached a record 7,046 units as of the end of the first quarter, representing 8% growth versus the prior year and 2% growth sequentially. AVANCE units online grew to 3,447 units, up 28% year-over-year and now comprised 49% of our total fleet. We expect our advanced aircraft online growth rate to accelerate in the coming months as dealers resolved staffing challenges that are contributing to slower installation rates and more of the equipment we shipped at the end of last year is brought online. We continue to expect the primary service revenue growth driver to be from additional aircraft online as we execute in a global market that is only 22% penetrated with in-flight connectivity and we launched two new products, 5G and GBP. Total ATG ARPU grew 2% year-over-year to $3,389 driven by recurring revenue and higher priced service plans. The launch of Gogo 5G in Q4 this year, followed by our GBP product in the second half of 2024 are catalysts to further expand our ARPU growth…

Thank you. [Operator Instructions] Your first question comes from the line of Ric Prentiss with Raymond James.

Thanks good morning, guys.

Hi, Ric

Hi, good morning. A couple of questions, if I could. First, Oak, you started with, obviously, the state of business. You mentioned 15,000 business jets out there, you guys have about 50% of that 50% or bounced help people understand why do you think that market is so underpenetrated. You talked a little bit about the technology changes and demographic shifts, but help people understand how you think that curve plays out of what drives people to say, "Yes, I want in-fligh connectivity on that pool of business jets. And then on the 10,000 turbojets sticking with the US, what is it there? Does it require price? Is it antenna? What is it that gets turbojets to come on board? And then the third part of the question is obviously the global side of it. What do you think spurs people to come to say, "Yes, I'm ready to pay for in-flight connectivity?

Right. So we'll start with Jet. 50% given that -- that this has been lying fit for, I don't know, roughly 10 years or so, I would say, isn't that bad when you think about it. A lot of the jets are trying the older than significantly older than the amount of time that this has been -- our service has been line-fit available at the OEMs. So all that has to come through the aftermarket. And frankly, I think that service levels have to do with it. And I think that the incredible increase in the capacity, we'll be delivering with 5G and GBB, et cetera, will be a real incentive for people to install service. Second, you have to do it. Generally, it takes a long time to install. Our systems are faster than installed than others, but still probably haven't been fast enough. So we really focused on reducing install times so that you not only have to wait for -- you don't have to wait for a big maintenance event. You might even just go in and do a standalone upgrade or install rather. I'd say the lower end of the business jet market, there's some price sensitivity, but that's where we've got L3 positioned and lower price plans that go with that. So I think that's why we've been pretty successful in driving penetration of the light jet market over the last couple of years. So it's a combination of all those things, it's generational. I mean a lot of business jets five, 10 years ago owned by people my age and many of those people didn't want to have connectivity on the jet or feel a need for it. That's really shifted as today. I think we did a whole of our user base…

Great. That's very helpful and will help people to frame it. And I think Jessi mentioned that GBB could be material in 2025, is that kind of the hope, and is that GBB opens up and unlocks that 14,000 global opportunity that haven't had the availability before and that's why -- and what those material, kind of, can you give us a hand on what material might mean in 2025?

I am not in charge of the definition of material, so I'll let Jessi deal with that. But we're looking to commercially launch the GBB antenna and network in the fourth quarter of 2024. So you can imagine installs starting to hit at the end of 2024, going into 2025. So that's, I think, why we say material, and we'll start getting service revenue really in 2025 on it. Yes. Okay, so.

It's still going to be heavily weighted beyond the equipment side, but you'll start getting some service revenue.

Great. Last one for me. And, of course, I know I love service revenue guidance rather than just total revenue again, because I do think the overall value of the company is going to be more driven by service and the one-time equipment revenue. But the final one, $100 million debt pay down, that sounds nice way to get debt reduced as the hedge comes down for step down. How much cash do you think you need on hand to run the business particularly as you look at maybe the working capital pressure with the FCC program, and then remind us of what the other step downs on the hedges are as far as timing?

Yes. So I mean, the cash that we would like to have on hand. As a reminder, we have the $100 million revolver available to us. So we always have that, but somewhere between $50 million to $75 million, we'd like to be a little bit more conservative and making sure that we have that cash on hand. And especially, as you noted, with some inventory requirements with FCC initially until we get the reimbursement back from the government. So there could be a small lag in that initially. And with regards to the hedge pay down, we've got the 125 pay down that happened in July of this year. And then the next pay down is in December of 2024. So it goes from $525 million down to $350 million, and then it will step down to $250 million in terms of what's hedged, it will step down to $250 million December of 2025, and then December 2026 down to $200 million.

Great. That helps a lot. All right. Thanks everybody. Stay well.

Thanks, Ric.

Thank you. Your next question comes from the line of Phil Cusick with JPMorgan.

Okay. Thanks. Just a couple of follow-ups on Rick's questions. Maybe talk about the long-hauls to launch the GBP network. Any update on OneWeb's progress there? And what else has to happen for you to get that up and launched in 2024? What are the big pieces? And you talked about what the alternatives are today, but what are the alternatives that look like they're coming down the line? Who else is working on products for global private aircraft? Thanks.

Yes, sure. So the long -- There's two long-hauls. One is the OneWeb network. They've launched now all the satellites they need to complete their global network. They do have, I think, another two launches, but those are all spare satellites. So what they need to provide our services actually in the space. They need to position those satellites now in their orbital claims and get them up and operational. I think that -- they will -- and there's some software changes they make for Aero. So that will all get done, I think, by the middle of next year, and I think that will be a slightly shorter poll than the other one, which is our building of our terminal, our aircraft terminal, which we're doing with Hughes. That program is in great shape. I have to say, working with Hughes is real pleasure. Their operational maturity and program maturity is outstanding. And so we've been able to actually move that project in. It was going to be a early 2025 delivery and now we're into the fourth quarter move to the left. And I think we see, frankly, some opportunity perhaps to even move in a little more. So that's going extremely well. I'm not going to give away any secrets, but we're going to have some fun news about that at EBACE in Geneva at the end of May, the big Global Business Aviation Convention. So those are related two poles, and I think both are in very good shape at the moment. And in terms of alternatives right now, I think, Starlink would be the main one. They have a large antenna today, 39 inches long, 31 inches wide, which is quite large for Business Aviation. That's installed on some Embraer 145s flying from JSX Airlines…

That’s helpful. Thanks, Oak.

Thank you. Your next question comes from the line of Landon Park with Morgan Stanley.

Good morning, everyone. Thanks for taking the questions. I was wondering if we could try on the OEM side. I'm wondering if -- maybe you could comment on what kind of take rates you guys have been seeing out of that channel and maybe how that's trended over the last couple of years. And any early indications you've had from them regarding GBB, just what the outlook looks like there? And then separately, I was just wondering if you could talk about what the EBITDA cadence might look on through the year, given that the 1Q level was already at sort of the high end of your guidance, it seems to include some one-time expenses. So how should we think about the puts and takes through the rest of the year there?

Sure. So I think the OEM part and leave Jessi, with the hard numbers part on EBITDA. Our take rates are very widely by OEM, I would say. We have very high take rates at the Textron’s and OEMs and Embraer's today, less so at Gulfstream coming out of line fit, for instance, but we often get put in, in the aftermarket there, same at Bombardier. So it's a little hard to say exactly what the take rate is because often we're installed sort of just after it comes off the line in a service center or something like that. However, I think that, the way to think about it, about 65% of OEM delivery stay in the United States, something like that. And so we're kind of limited to that side of the opportunity, if you will. And we would be on almost all Textron planes delivered to that market, very high-percentage of Embraers, and then less so, like I just said on the Gulfstream and Bombardier and Dassault. However, we have very high penetration of the Bombardier, Gulfstreams and Dassault. But again, that generally comes in, in the aftermarket. I would say our take rates have been growing which is good. And then, I would say that on GBB, the receptivity is just outstanding. And I've never seen the OEMs as excited as I see them now across that product.

And in terms of the EBITDA for the rest of the year, so definitely, the revenue is going to be higher on the second half of the year than the first half, as we passed-through, but we will have some increase in expenses. So in Q1 the GBB, expenses was only $1.5 million and 5G expenses was only $0.4 million. So, both for 5G and GBB, those expenses are going to be picking up as well as the other operational initiative expenses. So that will have some impact on the EBITDA going forward while the revenue is growing.

Understood. That's very helpful. And then just a follow-up on the OEM side, maybe just including the aftermarket installs would come shortly after delivery? What of those 700 with the 65% in the U.S., is it nearing 90-plus percent, in terms of what you guys can get off of that? And -- just maybe more broadly, are you seeing anything on the macro side? Have you picked up any customer sensitivity or anything along those lines?

Look, we haven't shared the attachment rates at the OEMs. We can contemplate sharing those in the future.

Okay.

So I'm not going to give you exact numbers. But like I said, if you First of all, but today, we are limited to those that are being delivered in the U.S. I'm going to give you a little wrinkle, which is sometimes those that are ordered overseas do install our equipment, but they don't activate it and they install it in order to have a get better pricing in the aftermarket and when they go to sell that aircraft. So they think they have our product and then they sell there. So there's a little bit of a wrinkle there. But I think that if you look at Textron deliveries in the U.S., we're probably close to 90%, something like that. If you look at Gulfstream, it's going to be at the other end, it's going to be sort of 20%. So then…

Okay.

Yes. And because sometimes in the aftermarket at least if it's a relatively new Gulfstream it's going to be at a Gulfstream aftermarket facility generally. We don't look at that, I would say, as a line-fit OEM install. So we don't really count it that way. So that is complete we were sharing that in the future Landon, but I think I'll give you the color.

That's very helpful. And is there anything on the macro that you want to add?

No. And when you say macro, you mean, macro economy?

Yes, the macro economy…

It impacts people’s feeling. Well, it's on people's minds. We did a little hole of our Dealer Advisory Council in roadshow to visit dealers and so in all, I would say, let's call that 12 to 15 dealers. And only one mentioned the economy being the issue. There are a lot of other things that got mentioned that might ultimately be economic, but we're more, I would say, micro in reality. So -- there's been no real impact on orders at the OEMs, right, Will. I mean they continue to be strong. And from the dealer perspective, they are busier than they can really handle right now, catching up on maintenance from over time. I mean, they're literally planes parked on ConneX that can't fly because they're no longer in compliance on their maintenance logs they're trying to get that work done, so those planes can start flying again. So everybody is very, very busy. So I don't think the macro economy has really hurt the market.

Great. Thanks so much for taking the questions.

Thanks, Landon.

Thank you. Your next question comes from the line of Lance Vitanza with TD Cowen.

Thanks guys for taking the question. Maybe just to stay with the theme of the dealers and the shipments and activations and the turbulence there, I think the concern is that it does raise the specter of perhaps the macro pressures are kind of bleeding into the business jet demand. But just to be clear, it sounds like really what happened is that the dealer has requested a lot of shipments historically because the lead times have become concerning and now that's reversing. And it doesn't sound like the underlying kind of final demand has changed much. Is that fair? And I think you said, if anything, it's stronger than pre-COVID and presumably, it's also stronger than where it was before the supply chain sort of got challenging. Is that fair?

Yes. I think that's all fair. We had a huge Q3 and Q4 shipments, record breaking. Some of that, I think, was driven by the still COVID ordering patterns. I think also our equipment prices go up every January 1. So I think people are loading up ahead of time on equipment before the price increases kicked in. So -- and I think that they bought enough inventory to last them well into this year. And they don't need to backfill but they're taking off the shelf to install. They've got -- already got plenty of inventory on the shelf. So I think that's the real impact right now. The important thing to us is getting the plant to gear on the plane and activate it and producing service because as Rick pointed out earlier, that's the [indiscernible]. So we're happy with that and a little inside baseball. We had a really good activation quarter, it doesn't show so much in AOL because when people go into maintenance or they put the aircraft up for sale, they often almost always spend the service for a couple of months or however it once it's long it takes to sell the debt. So there's a little dampening there because those sales activities have picked up in the last year and the maintenance activities are picking up. So but that's all temporary, right? Most of those -- the ones that go for sale almost all come back online, often was an upgrade, which we like. And the ones that go into the shop, they turn it back on as they come out of the shop. So -- and obviously, if the grounding way to get their shop, they're really not going to -- they're really going to turn it off. They can’t get to the shop once they start paying make a bit they're not using. So those tend to dampen AOL, but we had good demand on the install side and activation side. And so we feel pretty good about that. The issue we found a couple of times is this plane is meant to come in for two months. It's going to get all the following things done and they want to sell them an IFC system. However, if I do, because of my labor issues, I got to add two weeks to the two months and the customer won't accept that extension to the maintenance window. So those are the types of things that do dampen things a little bit. But like I said, it was our second best activation month ever -- quarter ever and certainly our best first quarter activation.

Great. Thanks. Appreciate it.

Thank you. And our next question comes from the line of Louie DiPalma with William Blair.

Hey, Louie.

Oak, Jessi and Will good morning, and Jessi congrats on your first call as CFO.

Thank you.

Oak, you provided several metrics for the 5G pre-provisioning. What are the next technical milestones to look for with the 5G launch, and is there a risk that the launch could slip to early next year?

Well, we're on track right now in terms of getting the chip fabrication completed at Samsung and getting that chip to GTT, Airspan and us on schedule. That looks so all be on schedule. We've done almost all the testing we need to do on this system already, but we have not tested as anything that just relates to the 5G chip. So clearly, that testing has to take place, which will happen generally late second quarter, early third quarter. We'll be flying it in the third quarter. There's always the -- that’s one possibility that something goes crazy at Samsung again or whatever. But with the amount of attention, Samsung, Airspan, GTT, and we have all paid to this chip at this point. It would be shocking if there was a problem with it. So we're quite confident, we'll be delivering in Q4. And now it appears to be completely on schedule.

Okay. Excellent. And Oak you also discussed, how the 5G service is expected to be five times to 10 times faster than your current AVANCE ATG product. And as it relates to small and midsized aircraft that only fly in the US, I know you were just talking about Textron aircraft. But do you think that those aircraft, the small midsized aircraft would be good candidates for the global broadband product? Or do you think that for small and midsized aircraft that only fly within the US that most likely they will stick with your ATG products as that appears to be fast enough for most of their needs as it relates to streaming or video gaming and phone calls and whatnot?

Yes, that's 100% right. And I think also, it will be priced to appeal to that market. So, I think that ATG, if the mission is generally US is a very good answer and 5G is a very good answer. So that's where we're positioning that product. The GBB product, we're really positioning for obviously the international claims that fly outside the US most of the time. For heavy jet in the US that fly outside the US, often enough to want to have a system that can handle that overseas. And in that market today, we've already got like the heavy jet market, where over 50% of the US heavies have our system -- our ATG system on this today, probably about half of the heavy -- the super mids have our system and a lot of those are advanced already. So for them to add GBB is going to be a pretty heavy -- pretty easy lift and it can replace their current geosatellite products. Often, they have us and the GEO product. So, a lot of that market looks at this, I'd really love to have one throat to strangle, one provider and one price for the bundled package that I can pay one bill. And I think that the LEO will provide better service than GEO. So that market -- that's the other market where GBB is really a…

Great. And one last one for Jessi. Will there be a material step-up in recurring cost of service expenses with the launch of 5G this year and the global broadband networks next year, will there be like significantly higher like backhaul costs and power expenses and other data center software fees that we should be thinking about? I know Oak and Jessi, you previously outlined expectations for significant margin expansion. And I'm just wondering, what types of additional costs we should be thinking about?

So 5G backhaul, it's in our guidance and it's in our long-term forecast that we've been providing. So there will be some increase in the 5G backhaul. And as mentioned, with GBB, we're paying by the drink on that with one left. So that will be flowing through cost of those as well. But we still expect the margins to be in the 75-plus percent range in the long term. So -- that's included all in our plans.

Great. Thanks, Jessi. Thanks, Oakleigh.

Thank you

I would now like to turn the call back over to Vice President of Investor Relations, Will Davis for any closing remarks.

Thank you, everyone, for joining our first quarter earnings call. This now concludes our call, and you may disconnect. Thank you.