Good day and thank you for standing by. Welcome to the Q3 2023 Gogo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Will Davis, VP of Investor Relations. Please go ahead.

Thank you, Bella, and good morning everyone. Welcome to Gogo’s third 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 our risk factors in our annual report on 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 November 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 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 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 Q3 2023 earnings call. Gogo achieved solid bottomline results in the third quarter, despite aviation industry headwinds and a slowing of orders as customers await the launch of Gogo 5G and Galileo, both of which will reaccelerate our growth starting in the second half of 2024. On the positive side, several of the headwinds I discussed last quarter, like suspensions and deactivations, which are mostly temporary in nature, have started to normalize, and in fact, we achieved the highest third quarter ever for new activations. On the flipside, supply chain issues and labor shortages continue to impact our OEM and aftermarket partners, delaying new aircraft deliveries and extending maintenance cycles, which in turn have reduced equipment revenue and slowed the growth of service revenue for Gogo. Despite that, we have maintained our profitability levels partly due to our shift to 5G investment dollars to 2024 and partly due to strong cost management. As a result, we are lowering our revenue guidance for 2023, but raising guidance for adjusted EBITDA and free cash flow to the high end of our prior ranges. The change in guidance is very disappointing. These near-term headwinds do not change our view that Gogo is poised for explosive growth in 2025 and beyond, and we are not changing our long-term targets. First, we serve highly unpenetrated market, with 78% of the world’s business aircraft flying without a broadband solution today. Second, we see unprecedented demand with a surge of travelers choosing to fly private aviation post-COVID and those travelers demanding connectivity. Third, we have an attractive business model based on recurring service revenue that drives strong cash flow. Fourth, we are incorporating new technologies into our platform to deliver order of magnitude improvements in service, to dramatically increase our TAM…

Thanks, Oak, and good morning, everyone. Gogo delivered solid bottomline financial performance, as we continued to invest in our strategic and operational initiative, including Gogo 5G and Gogo Galileo, to enhance our competitive position for the future. In my remarks today, I will start by walking through Gogo’s third quarter financial performance, then I will turn to our balance sheet and capital allocation priorities, next I will provide an overview of the financial impact of the FCC program, and finally, I will provide additional context around our revised 2023 outlook and wrap up by reiterating our long-term targets. Total revenue for the third quarter was $97.9 million, down 7% from the prior year and down 5% sequentially. We delivered record service revenue of $79.5 million in the third quarter, a 6% increase year-over-year and a 1% increase sequentially. Our ATG aircraft online reached 7,150 units as of the end of the third quarter, representing 6% growth versus the prior year and 1% growth sequentially. While Gogo is showing improvement in incremental ATG aircraft online from 18 units in the second quarter to 86 units in the third quarter, these remain muted due to temporary suspensions, driven by elongated maintenance cycles, which took aircraft offline. In addition, we had record upgrades in the third quarter, and while strategically important, it also contributed to the muted aircraft online growth as it replaces existing aircraft online. AVANCE aircraft online grew to 3,784 and now comprise 53% of our total fleet, up from 45% last year. Increasing aircraft online with the penetration of our AVANCE products remains critical to Gogo’s strategy both in the North American market and globally, as we prepare for Gogo 5G and Galileo. As we mentioned last quarter, we continue to expect the AVANCE aircraft online growth rate to accelerate…

[Operator Instructions] And our first question comes from the line of Richard Prentiss with Raymond James. Your line is now open.

Hey. Good morning, everybody.

Good morning Ric.

Ric.

Hi.

Appreciate all the details. I want to probe into first the competition side, as we have talked a little bit about testing your offers versus others. It’s not on the BA side but interesting the Hughes announcing the Delta version of jet contract. I am wondering if you are thinking of others start coming into the BA space as well and then maybe an update on the SmartSky lawsuit, if there’s been any changes?

Yeah. So I mean the Delta Hughes deal is a large antenna GEO product at this point. So they are using the ThinKom 1717 antenna set which is about 5 feet long. It’s not a BA aircraft type of antenna, and it’s not ESA and it does not use LEO satellites at present. I think it’s Ka which is important. It’s really meant to be a way for Hughes to sell Jupiter capacity. So there are partner, this is consistent with our agreements and we have no issue with that at all. Second, you were -- I think you asking about potential entrants?

Yeah.

Yeah. I think our confidence against potential entrants has really grown. We spent a lot of time over the summer doing a lot of detailed market research and surveys around the world, and we did those on a branded and on an unbranded basis and the top four offers were always Gogo. Our really cheap L3 product, the 5G product for North American flyers generally medium-size jets on down they want higher capacity and then the FDX and HDX for planes flying outside the U.S. or medium size jets in the U.S. who want higher capacity and then FDX for the global transcoms. And so that gave us added confidence that we are developing the right products, we have the right service, we are looking at the right price points, the right coverage. And our whole strategy is to understand the complexities of this pretty small vertical, the fact that there is a lot of different segments that have different needs and be able to create -- take advantage or understanding all those different segments and create the right product, the right coverage, the right cost, et cetera for each of those segments. So we feel very good about that. Most people worry about Starlink coming in. I think, they are trying to find their way. They keep changing their mind about what they are going to do, and of course, that just doesn’t resonate very well with the business aviation market which has long lead times and where people want very steady partners that they know they can trust to actually deliver products -- service products, et cetera. So we feel good about that. And then the last question was on the SmartSky litigation. There’s still no decision in their appeal of the lower court denial of a temporary injunction and we view that as a good sign, because it’s been close to half a year now, since that was heard and if the court really felt that there was an urgent need to grant an injunction one believes they would have granted that by now, because when asking for a temporary injunction when asked to sort of circuit time of the essence. So we feel good about that. And the general trial, which was to come later, I believe that goes to trial in April of 2025 or August of 2025, I can’t remember which month it was, so that’s still a ways out and there will be a lot of Markman hearings and all that over the next year or so, so that will go into discovery and it will be time consuming and somewhat expensive process.

Okay. I just want to make sure I also understand the 5G, Galileo operating initiatives. Jessi, I think you said the $15 million impact OpEx-wise and 2023 is like $3 million for 5G, $10 million for Galileo and $2 million for others, the 2024 Galileo looks like it’s going to be $30 million. Is the 5G is that just $7 million, is that gap push out, I was just trying to think about the total 2024 impact is to compare to the $15 million EBITDA impact for those three items?

Yeah. So, Galileo, as you mentioned you have that right. It’s expected to be around $30 million -- approximately $30 million next year. 5G, so we pushed out $7 million of OpEx from this year to next year, but -- so we are expecting $7 million in OpEx next year and then for CapEx we are expecting that to be more like $14 million. So we pushed out $10 million from CapEx this year to next year, but we had originally planned to have a little bit of additional CapEx next year. So total of $14 next year. So 5G spend in total will be $20 million next year.

Okay. And then last one for me is, and obviously, the balance sheet is strong, the bottomline you have been working through that. How much cash do you want to keep on the balance sheet to run the business as we think about all the different components you are looking at and also obviously the FCC reimbursement?

Yeah. So we would like to be fairly conservative on this. I mean, I think, the range is around 50% to 75%, which is higher than what we would need to run the business, but we would like to be conservative. So when we talk about…

Make sense.

… maintaining adequate liquidity, that’s usually the amount that we are keeping in mind.

Makes sense. Thanks a lot for answering the questions.

One moment for your next question. And your next question comes from the line of Lance Vitanza with TD Cowen. Your line is now open.

Hi. Thanks guys. Thanks for taking my questions. Just a couple around the new product launches, first on 5G. What are the milestones that you can point us to that would help us get more comfortable around the certainty, if not the exact timing of this launch? I mean what specifically needs to happen between here and there?

Right. So I tried to run through some of those in the call. I’d say, the first would be the chip factory going into production in the foundry, as that service, the clock starts then. I would say, second would be, our delivery and late Q1 of the FPGA technology to us, because that sort of new 50-megahertz capacity FPGA version of the chip, we will be able to burn down a lot of risk. We will be flying that in Q2 and because it’s an exact software replication of the chip, we can burn down all software integration risk, we can burn down all integration testing across the network risk. So those are very significant. The only thing -- the only risk we cannot burn down with that is, an issue in the 5G chip from a hardware perspective, that you have to test it after it comes off the foundry. And then later dates would be, when that chip comes off the foundry, and then when we take delivery, because as I said, bring up process between it coming off the foundry and being delivered to us and then our start of flight testing. I think those are the major milestones.

That’s really helpful. And how long does the flight testing component take what would you expect?

We start testing flying the whole network, it takes about two months, but once we have the chip, but we will burn down most of the risk around flight testing and fine-tuning of the FPGA.

Right. I am not so much worried about the risk, as I am just trying to think about the timeframe and calibrating there but that’s helpful. And then just sort of related question, I guess, with the Galileo launch, set to launch relatively quickly on the heels of the 5G launch, do we have to worry about the 5G launch being softer than expected or pressured by aircraft operators, basically saying, what, I was going to go with 5G, but now Galileo is going to be here in a couple of months, maybe I should hold off and wait for that?

Yeah. Look, it’s not ideal to have these two product launches land on top of each other and that wasn’t the design as you well know, we were going to originally have 5G out last year. But I think that, we don’t see a conflict, because we don’t see -- we see these products is being positioned at very different segments of the market and while the delays have sort of confused that communication, I think, we are starting to see it get straightened out. The 5G is really aimed at North American market, because that’s its coverage, it’s aimed at those sort of medium size jets on down that want a really good product but are still somewhat cost conscious, right? They want an affordable product and 5G will be cheaper than any satellite product. The HDX is aimed at sort of medium-size jets on down the outside the U.S. and those planes today have no connectivity option whatsoever, no broadband connectivity option, whatsoever. And medium-size jets on down that fly outside the U.S. like to the Caribbean or Canada or Mexico, et cetera, Hawaii, which is in the U.S., of course, but it is over a large piece of ocean. So that’s where that’s aimed. And then the FDX is a heavy jet product, and that’s for, the big jets that either fly around the U.S. and a lot of connectivity or fly transcontinental routes and it’s going to be more aiming probably at the transcontinental space. So they are very different segments and we are trying to be very clear with the market in terms of communicating which products should be the right products for each segment.

Thanks very much, I appreciate your help.

Yeah. Yeah. Thanks.

One moment for the next question. And your next question comes from the line of Scott Searle with ROTH MKM. Your line is now open.

Hey. Good morning. Thanks for taking my questions. I appreciate all the detail. And maybe, Oak, just to dive in quickly in terms of the maintenance events, engine part availability, et cetera, that has been delaying AOL. The last quarter shipments for ATG units were down pretty significantly, I think, they are about 100 units below where it had averaged over the last six quarters or so. It sounds like despite that you are having record activations and you are starting to see a pickup in terms of suspension going away in the month of October. And I believe you indicated as well that there are only about 40 units in the channel that are unspoken for. So implied in the fourth quarter guidance is another weak ATG unit quarter. So the question is, as we get into 2024, are we completely burned down in normalized in terms of channel inventory and that balance now with prolongated maintenance events, but now that’s starting to work its way through the channel, we start to see a re-acceleration both of ATG units being shipped and AOL aircraft starting to ramp back up again?

Yeah. I think the inventory burn down is definitely taking place. When you really look at the 850 or so, there’s an awful lot of those that have actually already been installed. We talked about 200 last quarter, this quarter, that’s down to 187 and actually it’s much more dynamic than that. There were -- of the 200, 79 were actually activated, that was then offset by increased shipments that took that number back up to 187. So we are feeling much better about that part of the inventory, if you will. And like we said, of that 140 are spoken for, 32 of those really are at dealers that took inventory one or two units during COVID, hoping they get an order, they haven’t and that may be sitting there, but the rest are just a couple of dealers that move a lot of inventory. So we feel that is normalizing and then that will help orders somewhat. I think the countervailing force next year will be people want to make sure that they don’t end up with a lot of L5 inventory after we launch LX5. So that order to fulfill current orders, but I don’t think they will be stocking up… [Ends Abruptly]