Good morning and thank you for standing by. Welcome to the Second Quarter 2023 Gogo Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Catherine and good morning everyone. Welcome to Gogo’s second 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 that we have filed with the SEC. In addition, please note that the date of this conference call is August 7, 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 have 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 website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we will 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 welcome to our Q2 2023 earnings call. Though Gogo executed well in Q2, the results were not up to our own high expectations. On the positive side, we achieved strong new activations. The AVANCE platform now accounts for more than 50% of our install base and we hit some key milestones on our strategic objectives such as our LEO global broadband product, now dubbed Gogo Galileo. On the flipside, we suffered unusually high suspensions, which we will cover in detail in a moment. And we suffered a further delay in delivery of our 5G chip, both of which have caused us to take down guidance for the year and in our long-term model. There are few headwinds do not change our view that Gogo is poised for explosive growth in 2025 and beyond. We serve a highly unpenetrated market, with 78% of the world’s business aircraft flying without a broadband solution today. We see unprecedented demand with a surge of travelers choosing to fly private aviation post-COVID and those travelers demanding connectivity. We have an attractive business model, based on recurring service revenue that drives strong cash flow. We are incorporating new technologies into our platform to deliver orders of magnitude improvements and service to dramatically increase our total addressable market and to enhance our competitive position. And we have a strong balance sheet that enables us to make the investments necessary to deliver those new technologies. The price where we have seen that explosive growth and driving substantial return for shareholders is the 2-year investment cycle we are now in. They have built Gogo 5G, developed Gogo Galileo, and execute the FCC rip-and-replace project, all of which I will deep dive in a few minutes. This morning, I am going to start by getting deep into…

Thanks, Oak and good morning, everyone. Gogo’s second quarter performance continues to demonstrate strong demand for our services and products and a robust markets position. While we delivered solid financial performance in the quarter, especially at the bottom line even as we undertake significant strategic investments, such as Gogo 5G, and Gogo Galileo, it was below our expectations for certain operational metrics on top line performance. In my remarks today, I’ll start by walking through Gogo second quarter financial performance. Then I will turn to our balance sheet and capital allocation priority. Next, I will provide an overview of the financial impact for the FCC program. And I’ll finish up with an update and additional context on our revived 2023 guidance and long-term targets. Total revenue for the second quarter was $103.2 million, up 6% over the prior year and up 5% sequentially. Gogo delivered record service revenue of $79.1 million in the second quarter, an 8% increase year-over-year and a 1% increase sequentially, our ATG aircraft online reached 7,064 units as of the end of the second quarter, up 6% versus the prior year and up slightly sequentially. AVANCE units online grew to 3,598 and now comprises 51% of our total fleet and generates 52% of our ATG service revenue. Exceeding over 50% is an important milestone in the evolution of the business. We had 229 new activations this quarter, which is a record for second quarter activations. However, this was offset by an increase in temporary suspension store AVANCE and classic ATG units due to the maintenance cycle and other dynamics both discussed, which caused incremental units online to be muted in the second quarter. Additional aircraft online is the key driver of service revenue growth and in our view value creation for the business. We expect AVANCE…

Thank you. [Operator Instructions] Our first question comes from Richard Prentiss with Raymond James Financial. Your line is open.

Hey, good morning, everybody.

Good morning.

Good morning, Ric.

Yes. Obviously, some disappointment on the 5G chip delay we laid out pretty well, the Airspan to GCT to Samsung to sub design shop. How comfortable are you that they have got the issue identified? And what specific steps are they taking to get you comfortable them that the release date is mid-’24 now?

Yes, I think we’re very comfortable. They’ve identified the root cause. And as I said in my comments, they’re still developing the exact plan for remediation. We actually expect that next week. We’re very, very confident that these going to deliver I mean, they were very significant design house in the 4G world and did a great job there. And they are one of the few players that are competent enough to play in the 5G world. Right now, there’s really two chip companies that are producing 5G chips, Qualcomm and MediaTek. And we were too small for them. There are two others coming along behind them. And GCT is one of those two, and we think they’re front runner there. So we’re confident in them. They’ve also made some changes in their lineup in terms of the sub design house that Samsung designated before now. They’re pulling in a sub design house that GCT is more familiar with and has worked with a lot in the past. That gives us confidence. And because of the sort of acute nature of this at this point, both Airspan and GCT have really opened up to a combined working team with Gogo’s project management team to really manage this, I guess in a more transparent manner for us so that we can keep a very steady eye on how things are going. So we’re confident that as you know, there’s always risk in these kinds of projects. And if we will know more in a week or two, and we’ll keep people updated as things develop.

Great, thanks for that. Also, in your prepared remarks, you talked about that there were some customers that were looking at wanting to understand competitive offers that might come into the marketplace. Can you elaborate a little further on that, is that the GEOs, is that the LEOs, is that air to ground? Kind of where are people saying? Well, let me take a look at what the competitors might be offering?

I think everybody is kind of curious about, but Starlink will do in this vertical. I don’t want to speak for Starlink. And – but I think that they seem more focused, frankly, on other verticals right now that are easier to serve, where there is less customer service demand, and then frankly, there is a lot more of a revenue opportunity for them. People are not terribly curious about GEOs at this point. And frankly, due to some of the bad luck that ViaSat had, the GEO presence in the market is, I think more at risk than it has been in a while. And I think we are very – we are quite convinced that LEOs are going to replace GEOs overtime in this vertical. And then the last one would be, SmartSky who is still around, and has been making a lot more noise recently in terms of their publicity. But I think they have a hard path in front of them, just because their product is probably about half the speed of our 5G product. And their customer service is really not there. And this is a market where I think an established player, that’s profitable, that has great customer service, that has reputation of delivering and a better product is probably going to win. So, that’s how we view the competitive environment.

Okay. And then finally, for me on the suspensions, obviously, somewhat off-guard, what’s the best way that you all have found to kind of get a handle on the suspensions? And how should we – from the external side, what’s the best way to think for us to kind of monitor suspensions and trends?

Well, we track every deactivation and suspension by a cause. And I have shared some of that data on the call. So, and then on top of tracking it all, we reality chested are tracking in the quarter by reaching out to 197 accounts that had been – that were suspended for more than 45 days in the second quarter. And we just basically corroborated our own data. Most of the ones that were suspended were actually still on maintenance. So, I think it’s hard from outside to really track it, Rick. I mean there aren’t – there is not published data in terms of how many aircraft are in the shop, or on the tarmac or anything like that. I mean you can track it probably best just anecdotally. And calling dealers and asking them what’s going on. So, we did have one anomaly in the quarter that drove things a little bit, which is one fleet, one small fractional fleet went bankrupt, and that was 15 deactivations. But in those cases, those aircraft will end up somewhere else and owned by somewhere else, and they are already installed. Most people will turn those aircraft back on. So, sometimes watching what’s happening in some of the fleets, you can see that news and that would be an indicator of potential impact on us.

Great. Well, I appreciate it. Stay well. Thank you.

Thanks a lot.

Thank you. [Operator Instructions] We have a question from Lance Vitanza with TD Cowen. Your line is open.

Thanks. Thanks guys for taking the questions. First on the 5G delay, obviously disappointing for Gogo and its investors, but what are you hearing, is anything from your customers, I guess our aircraft owners and/or dealers, are they complaining? Are they frustrated? I know in the last question, you talked about some of the competitive questions, but is your sense that are there questions around competition intensifying in the wake of the 5G delay or are people kind of taking it in stride? I am just trying to get a sense for the impact on pent up demand for the competitive products here.

Yes. No, I don’t think it’s changing the competitive dynamic any. People are actually pretty excited about having the LX5 finally announced in public. And the delivery date on that to coincide with the launch of 5G. A lot of – and I would say this, most of our big customers and dealers and OEMs were aware that LX5 was coming along under NDA. So – and they really love that product. I mean it’s so much easier to install than the former configuration where we had an L5 box and this X3 box. So, people are really happy about that. We are continuing to take orders. There are people that are changing orders from X3 and L5 to LX5 already. And while people are a bit disappointed, I think there are some of the dealers out there who are kind of relieved some of the OEM aftermarket divisions are relieved because they were kind of behind on their STCs. And this gives them a chance to catch up, a couple of them has that relief as well. So, I don’t think we see a big impact. Of course, but the impact to us is revenue loss and the unit count in the meanwhile, so.

Sure, of course. So, on the suspension side, you commented that when planes are grounded, they don’t want to pay for Internet. But I just want to probe that a little bit more, because part of our investment thesis at least has been that the cost of Internet was a pretty small fraction of the total cost of aircraft ownership, kind of whether you are flying it or not, perhaps that’s no longer the case. Can you discuss that concept, and maybe remind us, if you are paying GOEs, I know, obviously the costs are going to vary depending on what type of claim you have. But if you are paying Gogo, let’s say, $3,000, $4,000 a month for Internet, how much are you paying to hangar the aircraft and the other kind of ancillary expenses that are needed to maintain that plane?

Well, you are paying a lot more, that’s for sure. I can’t give you an exact breakdown with what you pay to hangar the aircraft. I mean most of these aircraft, that they are stuck without engines. For instance, they are sitting out on the tarmac, I doubt they are getting charged that much by the dealer when they are just sitting out there. They probably have some fee. But I am not aware of exactly what it is. The dealer is going to make most of their money taking the engines off, repairing them, putting them back on. They probably make some money in leasing engines for temporary use, which they are – which are hard to find right now. And that’s part of what the dealer would be charging. But I think that people, flight departments are trying to make the owners happy. And if an owner is going to ask, well, I am sitting here for six months, not able to use my plane, why shouldn’t we be able to reduce the expense in operating it. And the pilot or the director of the flight department is going to want to be able to say, yes, we shutdown the Internet, we are not doing this, we are not paying for that. So, you are actually saving money while we are sitting here. So and we have always offered suspensions for maintenance. And it’s one of the things customers like about us. So, it’s very common for that. For this, it’s, if you go back to COVID, for instance, we had a huge number of suspensions. I think 20% of the customer base suspended service. So, this isn’t, I would just say it’s not very unusual in times of when people are suspended, when they are gone for maintenance for a long period for them to suspend. And we also view it as something that, frankly, if you look at what Starlink says. Starlink says you can turn off your Internet anytime. We don’t want to then start making people pay for when their plane is down on the ground.

Sure. In any case, it ultimately, right, we certainly want the logjam removed, and is your sense that, is the industry sort of responding to the problem? And are we seeing more capacity coming online, or do you think that that we will see more capacity come online, or is it just, no, we are just going to have – we are going to have to sort of suffer through this period of excess demand for engines and parts and so forth?

Well, I think the engine OEMs, they are cranking up, their production is as fast as they can. That’s where the parts shortages really are impacting supply. And they have been hit with a couple of things. There has been a pretty dramatic increase in orders at the business in business aircraft OEMs, which is driving demand for engines. And then there is unusually high activity in maintenance events where people are wanting to lease additional engines at the same time. So, we would expect that they will be working through that over the next couple of quarters and that their supply will increase. And also the aircraft that need to go in for these big C checks, we will get through those. And that demand will decrease. It’s hard for us to predict the pace of that though, so we are not putting a quarter on it when it’s going to all turn around. And I imagine it will take a couple of quarters.

Sure. And then maybe just one quick one for Jesse. You mentioned this on the call that EBITDA, it sounds like you have benefited. EBITDA on the quarter sounds like you benefited from some non-recurring, and perhaps non-cash items in the quarter. Could you just go over those again quickly for me? Thanks.

Not the EBITDA, it was net income. So, our net income benefited from a tax benefit because we had a reversal of our valuation allowance. And then on the EBITDA side, there was a reduction in personnel expenses due to lower bonus expense. So, that’s not going to be necessarily recurring. But that was a benefit in the quarter for the EBITDA.

Great. Thanks so much.

Thanks Lance.

Thank you. [Operator Instructions] We will have a question from Phil Cusick from JPMorgan. Your line is open.

Hi, guys. Thank you. So, you have addressed this somewhat already. But I wonder if you could just explain to me, number one, where we are in the inventory issues? You talked about inventory drawdown last quarter. And number two, why do these maintenance issues hit now? You have had a deceleration for a couple of quarters in terms of ATG net adds, but this is pretty stark. And I don’t understand why it’s happening right now. And how we should think about 2Q on that path? Thank you. And I heard Jessi, I heard you talking about better in the second half. But the trend is not – it doesn’t look great for 3Q. Thank you.

Yes. I mean I think now because what happens in the charter fractional market to the dead, such huge demand over the last couple of years, they didn’t have enough jets to meet that demand. They are now taking deliveries at a more rapid pace from the OEMs. And that’s helping relieve that demand. But what had – there are a number of ways you can maintain an aircraft. One is that you take it in for a more frequent short inspections and maintenance events. And then that reduces the amount of time you have to be in for a large type of C check kind of maintenance event. But when you have got a lot of demand, and you have got, taking that jet out of the sky for those sort of short intervals, is a real revenue hit. Number of charter operators and fractionals would say, okay, well, that’s optional, we don’t have to maintain it that way. We don’t have to take it out now, so let’s delay. Well, what has delayed has put more pressure on these big maintenance events in this year. And we have seen it climb steadily, yes, started climbing, first quarter I think. We didn’t understand the full extent of that, to be honest, and we should have. But it did really accelerate this quarter. But when we go in and really look at it, and we go talk to people, it’s nothing different in terms of what, it’s just the numbers that are different, it’s nothing different in terms of they are going to competitors, or they are shutting off because they don’t want the Internet or whatever. So, I think that’s the real cause, Phil, in terms of why it’s going up now. I can’t tell you that we can predict exactly where that’s going to go in Q3 and Q4. But we started calling around some dealers last week, saying, hey, when can I get into get a C check if I wanted to, and that was the one answer we got. First answer we got was Q2 2024. A couple other dealers were more in the fourth quarter this year. So, there are – there is demand and people are booked. What was the second part of your question, so…?

I was trying to – the other was the where we are on the inventory, inventory sort of driving, you have no option. But just to go back to your comment. So, do you see this easing in July and into August, or should we think about a sort of a very low third quarter and then about in the fourth quarter? I am just trying to get an idea of where you see the sort of current level.

Yes, I can’t give you any more than I have given you. We don’t know what’s sitting out there in terms of 3,000 claims that could be, need to go into maintenance. So, I mean we are calling around and trying to figure that out. But I frankly, I just cannot predict. I can’t answer that question. On the inventory front, the biggest thing is how much of that inventory sitting out there is spoken for and how much isn’t. And I think we are feeling pretty good about that, because the amount that’s spoken for went up to 85% in Q2. So, I think about a couple of things. First of all, it’s about 900 units that are in that inventory account, about 200 units of those are on aircraft already, but not activated, because they are installed at OEMs, where we are basically standard line fit. So, we come out on every aircraft. Not everybody wants the Internet, however, some aircraft go overseas, they can’t really use it overseas, because we are the North American ATG company. And others, just don’t turn it on. They didn’t want to order it, it was just part of the aircraft standard. So, that’s 200 of the units. So, then we are down to 700 units. And of the 700 units, there is about 130 units that are not spoken for right now. And the vast majority of those, but 90 units are at dealers that regularly churn through inventory, so we feel good that those are getting installed. And then there is another 40 or so that are dealers that that basically ordered that inventory during COVID, just in case somebody came in and wanted an install, but they don’t regularly churn through our inventory. So, those might be at risk for not being installed for a while. But the rest I think are pretty solid. The other thing is activations are good. I mean we are having a record year on activations. So, it’s really not the pace at which equipments going into aircraft, it’s hurting us, it’s the pace of suspensions.

Thank you.

Thanks Phil.

Thank you. [Operator Instructions] Our next question will come from Simon Flannery with Morgan Stanley. Your line is open.

Thank you very much. Good morning. I wanted to come back to the new product developments. It will help us with the timing of getting real revenues out of the 5G product and out of the Galileo product. Does that really start from early Q3? Are we actually going to see aircraft flying and start to ramp fairly steadily from there, or is this sort of it will be a couple of quarters to really embed this, get it working properly? And then it’s really more of a 2025 before we see any material revenues from that, any color around that would be great.

Yes. I mean I think we often get a boost in equipment revenue, when we first launched, if there is a backlog of orders, so you could see that in Q3, Q4, next year. Service revenue, then those have to get installed, and so service revenue ramps a little more slowly.

When do you think you will actually have these services installed on the aircraft and actually start generating revenues? Is that a Q3 event for both of them?

Well, on the 5G part, we said, mid-year it would be launched plus or minus one or two months, depending on the exact remediation plan that the GCT implements. There are four options right now, but they all would have us launching mid-year plus or minus one month or two months on either side, depending which one they end up with. We will know that about in a week. So, you could see shipments in Q3, or if there is a delay over that or maybe Q4 for 5g, when we first start to ship. And then the service revenue would ramp up as those got installed in ‘25. On the – and I would say it’s kind of the same on the HDX terminal with Galileo. It won’t be until ‘25, of course.

Thank you. And then on the Galileo, you gave some speed estimates on the performance there. How does performance stack up versus Starlink for the OneWeb product? Is it going to be pretty comparable? Big differences, inter satellite links and things like that?

Yes, I think it will be comparable. And then the Gen 2, one may even move ahead a little bit. To be clear, the new announcement was around our FDX antenna, which is a larger ESA than the earlier announcement, which was HDX. So, the performance there I have shared of 190 megabits to 200 megabits per second, was an FDX performance, alright. And that’s designed for the heavier aircraft. Starlink, it’s still smaller than Starlink’s antenna. And in terms of performance, we think it’s comparable. I mean on JSX, they are doing 100 megabits to 150 megabits per second. So and everybody is very happy about that. So, we think 190 megabits per second to 200 megabits per second is great speed and will be viewed as comparable. When Gen 2, OneWeb comes out, which will have satellite links and all that, we actually see that speed doubling or tripling, even. So, that will be obviously a few years out, but it will be great. It will be a really great performance.

Great. Thank you.

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

Oakleigh, Jessi and Will, good morning.

Hey Louie.

Good morning.

Oakleigh, is there any change to the planned commercial launch timing for Galileo? And is there significant chip risk for the Galileo product?

No, there is no chip risk for the Galileo product. All of that is working already, which is why we were able to demo it. And there has been timing down, timing is, we actually pulled the delivery of the smaller Galileo antenna, the HDX in two months, but we did that a quarter or so ago. So, nothing new in this quarter.

Okay. So, is it still on track for the second half of ‘24 and further…?

Yes, exactly. Second half ‘24 for the smaller one, first half of ‘25 for the larger one.

Sounds good. And the engine logjam issue is well documented in the engine MRO industry for business, aviation. However, are there any signs that a significant portion of the deactivations is related to customers leaving for competitors, or are you are you able to pinpoint it to the engine logjam issue?

I think we are able to pinpoint it. I mean we actually reached out to 190 some odd customers in Q2 who had been suspended for more than 45 days, 66% of those responded and not one was going to a competitor.

Sounds good. And for the FCC reimbursement plan, the strategy is to upgrade the Gogo classic customers to AVANCE. Has there been any pushback from some of your strategic customers, or do you have visibility that you are going to be able to upgrade, essentially all of your strategic customers with this plan?

Yes. They are all strongly leaning to upgrades. And they need to do them anyhow. I mean a number of them have been putting off upgrade programs and are still flying the classic product and their customers don’t like it anymore, so they need to upgrade. So, we are making good progress there, Louie.

Sounds good. That’s it for me. Thanks. Thanks everyone.

Alright. Thank you.

Thanks Louie.

I am showing no other questions in the queue. I would like to turn the call back to Will Davis for closing remarks.

Thank you, Katherine. This concludes our second quarter earnings conference call. You may disconnect.