Good day and thank you for standing by. Welcome to Gogo Inc. Fourth Quarter 2023 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 note that today’s conference is being recorded. I would now hand the conference over to your speaker host, Will Davis, Vice President of Investor Relations. Please go ahead.

Thank you, Olivia, and good morning everyone. Welcome to Gogo’s fourth 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 February 28, 2024. 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 fourth 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 good morning, everybody. 2023 was a busy year for Gogo. We continued to grow our high margin service revenue and to drive Gogo's strong cash flows propelled by accelerating adoption of Gogo's AVANCE platform and fueled by strong business aviation demand for connectivity. At the same time, we're making great strides in our investments to future proof our business by extending the technology frontier in aviation with Gogo 5G and our low earth orbit satellite product, Gogo Galileo. We believe these new technologies will deliver order of magnitude improvements in the speed of Gogo service that they'll increase our total addressable market by about 60% and that they'll extend customer lifetimes by providing easy upgrade pass for existing ADVANCE customers. With the addition of Gogo 5G and Galileo, Gogo will have the most complete product portfolio in the business aviation IFC industry with products that offer the right performance, the right coverage at the right total cost with great customer support for every segment of the highly unpenetrated 39,000 aircraft global business aviation market. We also navigated temporary aviation industry headwinds related to parts and labor shortages and busy maintenance schedules. And though those continue to impact our OEM and dealer partners, we are seeing suspension intervals starting to shorten and reactivation rates starting to pick up, which will hopefully help boost aircraft online this year. Despite the delay in the development of our Gogo 5G chip, the market continues to respond enthusiastically to the 5G value proposition with ongoing pre-provisioning programs and a flood of STC programs that we believe position us for a highly successful launch late this year. And on top of that, we're executing the FCC Secured Networks Program, the support from the U.S. Government to enhance the security of our nation's infrastructure…

Thanks, Oak, and good morning, everyone. Gogo continued to demonstrate strong demand for our products and services in the fourth quarter, setting new records operationally and financially. Despite the unfortunate delays of our 5G program we discussed on our Q2 earnings call, the industry headwinds we've endured and the significant strategic investments we've undertaken in Gogo, 5G and Galileo, we delivered solid bottom-line financial performance and record free cash flow in 2023. Our ability to achieve these results is strength of our business model, financial position and investment strategy. And with the bulk of our strategic investments coming to completion at the end of 2024, we expect our free cash flow to accelerate substantially in 2025. In my remarks today, I'll start by walking through Gogo's fourth quarter and full year 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 on our 2024 financial guidance and the long-term targets we announced this morning. For the fourth quarter Gogo's total revenue was $97.8 million, down 10% year-over-year and remained relatively flat sequentially. Gogo's top line was driven by record service revenue $80.9 million, up 5% year-over-year and 2% sequentially. In the fourth quarter, our ATG aircraft online reached 7,205, up 4% year-over-year and 1% sequentially. Total AVANCE aircraft online grew to 3,976, an increase of 21% year-over-year and 5% sequentially, driven by a record number of total activations as Oak described. We expect another strong year of AVANCE activations in 2024 as we plan to aggressively upgrade our Classic Gogo Biz ATG customers as part of the FCC program, while maintaining a reasonably conservative view on improvements in the maintenance cycle times that have slowed…

[Operator Instructions] Our first question is coming from the line of Simon Flannery from Morgan Stanley. Your line is now open.

If I could turn to Galileo, there's been concern about some delays on the OneWeb constellation, particularly around ground stations. You didn't really reference any delayed concerns around that. I wonder, if you could just help us understand, what's the status of your understanding with OneWeb and then any risk of some further delays because they could continue to delay commercial launch? And then on Starlink, you talked about small antennas. Can you just help us understand what you're assuming in terms of Starlink's ability to address your existing fleet? Is that small antenna going to be competitive with the HDX antenna? And just on the kind of cost both of install and of service that you're seeing from these satellite services versus your existing ATG? Thank you.

Sure. So, we believe Starlink, I mean, I'm sorry, OneWeb will have the ground network complete to our satisfaction by the time we launch. We don't anticipate operating in Soviet Union or China or North Korea, places like that. So people always need to be, oh, is it totally global? Well, no, not really. You're not going to be able to fly over places you might get shot down. But generally, we think that they'll be done in time for us. So, we're pleased about that. Your second question was about, I believe, the Starlink small antenna.

Yes, exactly, the pricing around Starlink versus your Air Command.

Yes. So, well, we don't -- they haven't announced a small antenna. So just for planning purposes, we've assumed that they will. We don't know that they will. That's their decision, not ours. So, we don't know what it is. They've got various applications at the FCC for a wide variety of antennas of various different sizes, mostly for consumer market. But then they could repackage one of the smaller versions of those for aviation. It's difficult to do. We're not sure that those really are going to be aviation grade in the long run and have the reliability and durability of our equipment, which is designed from the ground up for aviation. But so, you have to ask Starlink that question about what they might launch in terms of the small antenna. For us, it was just a planning assumption, okay?

Understood.

And then, I think your last question was about install costs all in.

Yes. Just when you're thinking about people looking at GEO versus LEO, are you going to have a GEO system more people use Galileo of what use ATG domestically? And how do those are you dramatically cheaper than a satellite solution?

Yes. I mean, today, it costs about $700,000 to install a GEO satellite solution. We're much cheaper today than that. I think we will be less than half that cost in terms of equipment sale plus installation. And that's for a new installation. Of course, if you have AVANCE that will be a lot cheaper, because you won't have to do anything really inside the aircraft. You just have to add the antenna and the two cables power in and power out and the data in. So, we're considerably cheaper. We'll be considerably cheaper on service as well Starlink. And we just use their recently announced $10,000 a month unlimited plan. Today, you pay $30,000, $40,000 a month to the GEO stationary satellite provider for an unlimited global plan. So, they're either going to have to cut their pricing a lot to compete or which will be a big hit to them in terms of their cash flow or lose business. That's a pretty tough choice. I think that the superiority of LEO over GEO is substantial having used both. I mean, it's an order of magnitude improvement when you go to LEO. The latency is obviously much faster and then the capacity is also greater. So, it's a much better experience. So when you combine the fact that it's going to be much cheaper to install, it's going to be much cheaper to operate and the performance is much better. We think that if Starlink keeps coming into the market that they'll have a big impact on the GEO players and our Galileo product will do the same. And we think we have a few advantages that are getting in some parts of that heavy jet market, which are that we do have 1,300 jets on AVANCE already. For them, it's a very easy upgrade to add our product. So as I said in my script, I think we see Starlink if they enter and us both having a pretty significant impact on the GEO satellite players.

And just one last one on SmartSky, you referenced some of the litigation expense. Any updates there on their kind of presence in the marketplace?

No. Not really. We don't see any progress by them in terms of installing aircraft.

And our next question is coming from the line of Ric Prentiss with Raymond James. Your line is open.

Couple of questions, follow on Simon's questions there too. So, as you think about the addressable market, how are you taking a shot at what you think your market share will be as we look over say the next decade? And then who do you share that market with? Is it Starlink? Is it other LEO operators that you're starting to keep an eye on as well? But just help us understand kind of your base assumption to hit those free cash flow targets and the revenue CAGR targets about what the addressable market split up share might be?

Yes. So, I can't give you 10 year because we didn't do that we just did five, hope that will do. Okay. So, yes, this is all part of our annual long term model update that creates the guidance and everything else. So, yes, we build it from the bottom up. We go both North America we buy the world in North America and rest of the world. We divide that into segments of jets and then we look at everybody's value proposition and where we think they're going to be going in terms of pricing product etcetera and then build the numbers up from there. So obviously, we've got a big head start over everybody in the small and midsize jet market. We have the largest share of the heavy jet market today. A lot of people don't realize we've got 2200 heavies. I think the next biggest player has about 1800. So we have our we add our project rollout plans to that in terms of what we think we're going to be getting in terms of upgrades, new wins, etcetera. We look at our OEM positions and what the OEMs are going to be producing and what our attachment rate is at those OEMs. We go through the dealer channel and we look at everything that's being sold there and estimate what our share is going to be. So we build it really. It's very granular and bottom up approach. I think I shared the numbers in my script. Today, if you look at the global market and we include turboprops in our markets, okay, we have of the installed planes. We're in the low 70% of the global market. We're in the sort of low 80s in the U.S. market, which is by far the largest…

I want to come back to the '24 free cash flow guidance. Can you walk us through how can we get from EBITDA taking into account no cash taxes, you talked about cash interest, help us walk through the EBITDA of about $110 million to $125 million. How do we end up at $20 million to $40 million on free cash flow? Obviously, there's a lot of FCC stuff going on there. There's working capital. Just kind of help us bridge that EBITDA all the way down to free cash flow in '24?

Yes. So, exactly our adjusted EBITDA range is the $110 million to $125 million Our CapEx is projected to be at $45 million and then we do have net working capital. So, just kind of the main part of the difference and there is a lot of buildup of inventory that we're doing in 2024 in anticipation of 2024 and 2025 shipments. And then of course, we also have the net interest that we have as well included in there too.

So it really is the working capital and the inventory buildup that probably is the bigger swings there in the upstream.

Yes, the net working capital and interest.

And then, Jessi, I think you mentioned that under the current funding for as we call it, rip and replace, their spending will continue, but reimbursement would be played out unless they increase it. You mentioned that there could be a '26 free cash flow hit. Can you put a kind of a fence post around that and let us know kind of what the current program funding and your current thoughts would be as far as the hit in '26 free cash flow from the program?

So as Oak mentioned, we don't anticipate needing the entire $334 million and the reimbursements will end around towards late 2025. So there'll be some impact in 2025, but a greater impact in 2026. It's probably going to be somewhere in the range of $30 million to $40 million in 2026.

And the '25 long-term guidance of $150 million to $200 million excludes any effect from FCC. Would that be a negative effect in 25 number as well from the FCC program? I know it's pretty complicated and a lot of moving pieces in DC, but just wondering is that a negative hit that would hit '25 from that versus that $150 million to $200 million?

I mean, the reason why we've been saying it excludes our guidance excludes the just to be able to do the comparison to when we originally provided the targets. So that's why we wanted an apples-to-apples comparison. There is going to be a small impact in 2025. It's not as big as 2026. But yes.

So, we believe we'd still end up in the range.

Yes. We do believe.

We'd stay down in the range even with the FCC in 2025.

Obviously, depending upon timing, but as of what we're seeing now and the timing of the reimbursements, we expect that we will be in the range both with and without FCC.

And then last one for me, I think you mentioned you're getting your first fuse antenna coming and start trying in the summer. What's the first, did I hear that correctly? And second, what is kind of the thoughts then to be able to ramp that up following behind Simon's question about waiting for OneWeb obviously to hit the ground all the way there before launch. But where are you at on Hughes and what's the kind of the ramp as far as getting antennas from Hughes?

No. We're right on schedule to launch this product in mid fourth quarter. So that's the update. And this Hughes has performed exceptionally well so far and this antenna arrives right on time as called for in the project plan and is testing well. So we're very pleased with the progress there and remain on track.

And our next question is coming from the line of Louie DiPalma with William Blair. Your line is open.

I have a general question on hardware equipment costs. One of the main value propositions of AVANCE is the inexpensive and easier upgrade to 5G and the Galileo networks. And I was wondering, in general, what would you estimate is the difference in equipment cost for a customer to upgrade to hypothetically, 5G versus if they were to rip and replace and try to go to a competitor's like LEO satellite solution?

It all depends where you start, right? So if you've got, L installed on the DDA antennas, it's going to be, yes, it's going to probably be, that's going to be probably two-thirds the cost for equipment and installation that's going to a competitor satellite product would be.

And secondly, Oak, you referenced the FPGA 5G testing. When should we know if and when the new 5G chip is ready for production?

Well, right now, it's actually these are very technical terms. So production in chip world means you're in mass production and they're not there yet obviously. But they are in production in our sense. They're in the pattern of mass generation phase right now and that's what happens right before you start fabrication of the chip silicon layer by layer. So that's where we are.

When should we know, if the new chip works in terms of like the 5G components and the non-5G component in order to clear the hurdles that that weren't cleared on last year?

Yes. Well, so the FPGA will let us test whether the software side of the chip works, because that's what it is. It's sort of a big, it's a very big box. I would spend some time with it yesterday. But it emulates the physical structure and the FPGA and you can run, I mean of the 5G chip and you can run the actual 5G chip software on it. So you get all the software testing out of the way, in the FPGA stage, which is sort of novel and is giving us the ability to really accelerate the program. So, I would say we'll know whether that is all going well in April-May timeframe. There's a lot of tests. It's very complicated. We've got 14 layers of the chip that have our that are unique to us and run our software and it's all about this accommodating things like how fast radio waves move at the speed of light, the Doppler effect and signal strength and it's massively complicated. But we got lab here in Chicago that emulates all that and that's what we're doing now, doing that testing. So you'll know, we think April, May if that software is all doing well. And then it will probably, we don't have the fabrication masking just started and probably be several weeks before we understand exactly how long it will take to lay each layer of silicon. And then once we know that pace, we'll know when the chip will come out of the fab. And then, you have to go through bring up to actually test it to make sure it's all working. So we'll probably update people on that on the second quarter call or if we have any milestones between now and then that we can announce publicly.

And for Jessi, as it relates to the 2025 free cash flow guidance, you mentioned how it does not include the FCC reimbursement program and you also discussed I think how for this year you have an $18 million receivable such that the cash inflows seem to lag your cash outflows. And so is the SEC program expected to be negative for free cash flow in 2025? And is there any way to frame that?

Yes. As I was answering Ric before that we there is going to be a small negative impact in 2025 for two reasons. One is we continue to get a little bit of that lag, but then the funds do run out in late 2025. But as mentioned in terms of the guidance we provided, we feel that even with that, of course, if the timing of things changed with the SEC reimbursement cycle, then that potentially can change things. But regardless, we do feel that we will still be within that range with FCC. But it is slightly negative in 2025.

And my final one, you referenced the potential for debt pay down. Is there any framing in terms of how much like debt pay down would you be looking for like potentially to keep like the cash interest expense at that same like $33 million like annual run rate? And is that what you're looking to do?

No. I mean, I think that, when we look at this, we want to make sure that we kind of balance the use of our cash between debt pay down and potential additional returning of capital to shareholders. So, we'll look at both and kind of assess. We also need to see where our interest rate is going to be going. But with all of this, we do need to consider the hedge stepping down. So, we haven't necessarily identified an exact target yet that we're building a share, but we'll keep all these different factors in mind.

Well, the other major factor is share price. And with the share price down where it is, returning capital to shareholders becomes more attractive relative to paying down debt than if the share price were higher. So the Board of we're going to have active conversations with our Board on our plan. As you know, we spent $10 million on share buybacks in Q4 and Q1 so far. And we can't trade today, so we'll be in conversation with the Board tonight about what we're going to do.

And our last question is coming from the line of Sergey Dluzhevskiy with GAMCO Investors Inc. Your line is open.

My first question is on Galileo. As you launch that product, what markets or market segments would you prioritize in your push to sell global broadband over the next two or three years?

I think you're asking about markets we would prioritize.

Geography.

Oh, geography. Yes. Well, look, I guess I always start with the most attractive market. So to that those are probably Europe, Middle East, India will be early in the list. But South America is very attractive markets as well, so we will be paying attention down there, and then probably Asia after that. Rough order of events.

And my second question, given where the Company is today and significant organic growth opportunity. How do you guys think about M&A? Maybe if you could remind us your M&A philosophy and what makes sense for Gogo over medium terms that could accelerate utilization of your current strategy or just enhance overall shareholder value in general?

Yes. I think our view is that our organic growth is the right place for us to invest capital to grow the Company. And we see really nice returns on that and we also feel that is less risky than M&A. So, we don't have an active M&A program right now just based on that.

Thank you. And I will now turn the call back over to Will.

This concludes our fourth quarter earnings call. Thank you for your participation. You may now disconnect.

Ladies and gentlemen, that doesn't have conference for today. Thank you for your participation. You may now disconnect.