Thank you for standing by and welcome to Gogo Inc.'s First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to William Davis, vice President Investor relations. Please go ahead.

Thank you, Latif and good morning, everyone. Welcome to Gogo's first quarter of 2024 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman & CEO; Jessi Betjemann, Executive Vice President & 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 in 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 this 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 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 May 7, 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 this call, we'll present both GAAP and non-GAAP financial measures. We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our first quarter earnings release. The call is being broadcast on the internet and available in 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's now my great pleasure to turn the call over to Oakleigh.

Thanks, Will, and good morning everyone and thanks for joining us on this call. So Gogo achieved strong results in the first quarter, setting a record for free cash flow in open market share repurchases even as we continue to invest in bringing our next generation products to market. Gogo Galileo, our lower earth orbit satellite product and Gogo 5G, our next generation North American air to ground product. We believe these products will accelerate our revenue growth beginning next year as they deliver first order of magnitude improvements in the speed of Gogo's service; second, deliver a 60% increase in our total addressable market; and third, extend customer lifetimes by providing easy and compelling upgrade paths for our AVANCE installed base. Our first quarter performance was fueled by AVANCE equipment revenue, which experienced a rebound from Q4 2023 and record service revenue driven by a modest price increase and record AVANCE upgrades. We consider every AVANCE installation a strategic win because it provides that customer with easy upgrade pass to new technologies like 5G and LEO with Gogo rather than going to the expense of installing equipment from the competitor. The jump in orders we had in Q1 is great proof of that point. Our surge in orders was driven by 2 factors. First, OEMs that want to line fit install of AVANCE L5s often with 5G antennas so that those planes are ready for easy upgrades to 5G or Galileo. And second, pull-through in the OEM and aftermarket channels from NetJets who also wants to install L5s and MB13s to be ready for either 5G or Galileo. This morning, I'm going to start by highlighting some demand trends we're seeing in the BA market to continue to underpin our bullish outlook. Then provide an overview of our Q1…

Thanks Oak, and good morning everyone. Gogo generated record service revenue and free cash flow in the first quarter with adjusted EBITDA coming in well above expectations. While our results benefited from some timing related to equipment revenue and expenses, they highlight the strength of our core business as we invest in our new products Gogo 5G and Galileo. We continue to believe that 2024 is the top year for our growth and profitability within our long-term plan through 2028. With most of our strategic investments concluding 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 first quarter financial performance. Then I will turn to our balance sheet and capital allocation priorities. And finally I'll conclude with a positive update to our 2024 guidance and additional context on the reiteration of our long-term targets. For the first quarter, Gogo's total revenue was $104.3 million up 6% year-over-year and 7% sequentially. Gogo's top line was driven by record service revenue of $81.7 million up 4% year-over-year and 1% sequentially. Our ATG aircraft online reached $7,136 up 1% year-over-year and down 1% sequentially. The quarterly decline was driven by higher deactivations, of which approximately 80% was attributed to the attrition of hourly contract aircraft as a result of the price changes we implemented this quarter. However, the loss of these aircraft has a very low impact on service revenue of less than 21% for the quarter due to the low ARPU they generate. Another driver for high deactivations this quarter was due to an increase in the number of aircraft sold that we believe a majority of which will reactivate in the coming months under new owners based on historical trends. Importantly, total AVANCE aircraft…

[Operator Instructions] Our first question comes from the line of Scott Searle of Roth MKM.

Nice job on the quarter. Nice to see the continued progress on the Galileo front. Maybe just Jessi, quickly clarification on some of the financials. I think you had referenced and Oak had referenced permanent OpEx savings. I'm wondering if you could give us an idea about what that looks like. Also wanted to clarify, it sounds like there was the $400,000 step down in service revenue related to, I'll call it churning off smaller low-end customers. And what are you expecting in the guidance? So that $410 million to $425 million in the back half of this year for FCC rip-and-replace. And then I had a follow up.

So your first question with regards to some of the OpEx savings. So in the quarter we did have something, some of it was due to network and data center costs that came in lower than plan that's real and realized it's not a timing issue. We also do have some personnel savings. So in the quarter, it was around $3 million. And throughout the year, there will be some continued savings as well because there is some [ push out ] of expenses into 2025. What was your next question?

Well, there was a late year rip-and-replace question. Yes. Scott, you had asked about the late in year rip-and-replace impact?

The expectations for rip-and-replace this year, right? Because clearly it seems you had a great quarter as a related to equipment revenue. It seems like NetJets pulling forward. But what are you expecting in that $410 million to $425 million this year in terms of rip-and-replace contribution the equipment front?

With regards to the upgrades you mean?

Yes.

Yes. So I mean, this year is going to be a heavy year of upgrades. So that will contribute to our equipment shipments this year. We're seeing it obviously in Q1, but we will continue to see that through the year.

Okay, fair enough. And Oak, I'll dive in quickly on the 5G front. A little bit of a delay there. It seems like it was caught earlier. So that's the good news. Just general confidence level on that front. And there may be coupling with that. It seems like the dialogue and the tenor around Galileo has continued to get more and more positive. It has always been on or ahead of schedule, but now it seems like the market opportunities specifically for HDX and FDX are bigger than we would've expected 12 or 18 months ago. So I wonder if you could talk a little bit about how important that is relative to 5G and how that seems to be advancing and getting pulled forward?

Yes, I mean we've always spent more time talking about 5G because we've always asked about 5G more because it was always the next product launch and obviously a significant upgrade to our ATG networks in North America. So I think we've always felt that Galileo was probably the bigger opportunity in the end. And I think that the positive response we're getting from the market about it is very encouraging for us. And obviously strategically it is very important product in competing with Starlink as they enter in the market. So we're really excited about it. It's going to be a great product line and OEMs are very excited about it and the fleets are very excited about it. We're getting a lot of positive traction overseas, so we're very excited about it. We still think 5G has a very important role in our product line though, because there's just a lot of medium-sized jets on down that only fly in North America that frankly a little more cost conscious than other flyers. And they're not all that excited about putting on a more expensive satellite system. So for them 5G is going to be important. And we have commitments to OEMs and fleets and others who already have basically said they're going to buy the product. So we're not going to back off from 5G. It's still important to us. It is in a somewhat less competitive segment, I would say at the moment as well. So the time emergency maybe is not as great as it is for Galileo.

Our next question comes from the line of Simon Flannery of Morgan Stanley.

Just continuing on the Galileo opportunity. I think you'd said that you would ship the HDX terminals in Q4. So when do we start seeing service revenues out of Galileo? Is that really kind of Q1 where we start to see that? And then I think, Jessi, you mentioned the margin impact. Is it fair to think you're going to be looking at a service margin on reselling OneWeb in that kind of 50% range and any color you could provide around that and how is that mostly usage based or are there monthly commitments per plane and then something on the DXs there? Have we seen all the impact of that price increase, or do you think we could see more DX in Q2? And is it all principally the asset, the sale of aircraft, or are you seeing any competitive losses to Starlink or SmartSky or anything like that that's ticking up here.

So in terms of DX, I'll take that one first. I don't think we're going to see a lot more of that. We'll reserve judgment a little bit. It really all hit in February. The price increase and the minimums were implemented at the beginning of February. So I think that's going to be the bulk of that. In terms of competitive, we deep dived on that. We went and actually interviewed all of the customers who suspended in February. It was 50 some out of them. And only one had gone to competition. And that ironically was a jet that belonged to Davinci Jets, which is I don't know if they're the owners anymore or the founders of SmartSky. And they actually didn't go to SmartSky, they went to KA Solution, so that was funny. So that's that. We don't think we're losing any aircraft from our install base to Starlink at this point. I think we do feel that there is some pressure on new sales from them right now as customers look at the Starlink system. And obviously they are already out with theirs and we don't have our global system yet. So we feel a little pressure there. And we may have lost a few new sales there and heavy jet market. Those would only be Globals, of course. Global expresses. We don't really see any pressure yet on the Gulfstream side because Gulfstream's been pretty negative about the Starlink STC for Gulfstream Aircraft. So that's all and heavy jets still at that point. And again, we haven't seen any losses there. Simon, now you have to go back and remind me of the beginning of your question.

It was on the Galileo revenue. I can answer that. So I mean, the expectation is we're going to be having the equipment revenue, equipment shipments in Q1 and service revenue will be there in the second half, but it'll probably start to be a little bit more in the second quarter.

Okay. And margins?

Margins, we haven't commented on publicly. I would put it this way. We're taking an approach where we can sort of maintain flexibility because you never know where Starlink is going to go with pricing and we need to be prepared to with them. So to get sort of what I'll call for pricing flexibility, we probably have given up a bit of margin. And we expect to still have service margins and that begin with a 7 through this planning horizon.

In total?

Yes, in total. And so we feel pretty good about the business but we're not going to come out with sort sharing margin projections until we come to market.

Yes, I noted it's going to be -- I was just going to say, I've noted it's going to be lower than ATG, but still very strong healthy margin.

Understood. And does your system just work with OneWeb or could you incorporate other providers of capacity like Kuiper down the road?

Yes, we can and we designed our terminal to be portable from provider to provider. We expect that neo technology is going to develop a lot over the next 5 to 10 years. There are going to be other providers to come into the market. And our hope is that OneWeb continues to deliver a strong product and that their Gen 2 is a strong product. But we also need to be prepared to go elsewhere if it's better for our customers. So we designed the antenna, the terminal, we own the intellectual property for to be easily -- once installed, it is very easily removed. You don't have to go back inside the airplane and remove the headliner and all that, can literally unscrew it from the outside and slap another version of it on quite simply. But the new version would have the right aperture for the new supplier and the right modem for the new supplier in it. And so we're very portable in terms of future direction.

Our next question comes from the line of Rick Prentice of Raymond James.

Couple of questions. First I want to go to the SmartSky litigation. I think the judge had made some rulings on some definitions and some other items. There were some reports out there that thought it was less favorable to you all. But just explain to us kind of where we're at on the lawsuit? How you view the judge's rulings or definitions? And I'll come back, like give my questions one at a time so you can handle them.

We appreciate that. Yes, that was what's called a Markman hearing, and that's where the judge rules on the -- and how the patents should be interpreted. We were pleased with how the judge ruled and it hasn't changed our view of what we think the outcome of the case is. However, I will say this in my short brutish business career, I've learned not to comment on litigation and my lawyers are encouraging me to stick with that. So I'll kind of leave our comments at that. There were just some articles or an article that went around by a writer who doesn't know much about patent and law, who kind of made it sound like we lost the whole case, as from this ruling that's just not the case.

Okay. And any update to the timing?

The trial was supposed to be in April of 25 but now it looks like the judge is going to move that back and she has not set a new date.

Second question is on the guidance. Jessi mentioned that some reduction in some of the projects. I think now $33 million previous guidance had $40 million of OpEx, I think in there. So some reduction in shift out in timing. Just want to make sure is some of that then moving into '25. But then also a little note in the press release that said, guidance and targets do not reflect a potential delay in Gogo 5G beyond '24, but then you kind of thought maybe the launch is pushed out a few months. I just want to reconcile both those if I could.

So on the timing part around 5G, we don't know right now if it'll still launch in Q4 of this year or early next year. We're working with our chipset supplier to get definitive dates. There's a process that the chip's going through now, sort of a validation integration process. And at the end of that, they should have a better idea of when they'll go into fabrication. Then there's an opportunity to perhaps accelerate some of the fabrication steps. So we're looking at that and when we know more, we'll tell the world more. but that's why we are not yet projecting or including in our guidance any delay.

Yes. And the point about the strategic spend decreasing, I think last quarter we had $40 million, and this quarter it's $33 million in total for the strategic initiatives. And a large driver of that is a shift around $5 million of spending from OpEx to CapEx. And then there was about a $2 million overall savings as well. So that's what's driving that reduction. And that's also why, because of that shift from OpEx to CapEx, you don't necessarily see any of that uplift flowing through to free cash flow.

Okay. And then just one more on that '24 guidance and the timing. If it does slip out from fourth quarter, '24 into the early few months, push into '25, what items would be really affected on the guidance? Is it the equipment revenue? Could it lead to service revenues? Is it margin on EBITDA? What line items would we be watching in case?

Yes, so actually I think we noted this on the previous call. To be conservative, we did not factor in any 5G revenue in our guidance that we had provided. So revenue won't be impacted. It really will be on the OpEx side, there'll be a benefit because there could be some push out of spending potentially both for OpEx and CapEx.

So there's not really a downside risk there. There just could be some outside downside risks.

It's not a downside.

Yes, even though the project moves out, the revenues weren't expected anyway. Okay, that helps clarify that. And then Oak, I want to go back to Simon's question then also for my final one on the folks where the ARPU, the price increase, 4% price increase February, you think most of it was felt I think you said 80% of the DX were the hourly folks. So should we expect some normal course kind of deactivations as you're upgrading people to the advanced product? And is that why I think, Jess, you mentioned maybe some dampening of installs for a couple quarters here?

Well, you're going to see a lot of conversions and they don't drive units online. They will drive some equipment revenue, right? But you're getting a lot of people upgrading from Classics this year to AVANCE platform as part of the LTE rip-and-replace program. So you'll see that. In terms of what's going on as the dealers right now, we've had good signs and bad signs. I mean, everybody's sort of gotten used to managing in a somewhat screwed up supply chain world. And so I think the dealers are handling it better, customers are handling it better. We had a lot of DX in February. A lot of them have already come back though, so that implies a little bit of shortening of the suspension periods. But though on the other side, there's still a lot of engine problems and engine parts problems that are extending some suspensions. So we're not getting out of our skis on projecting any change in deactivation and reactivation at this point. We'll watch what happens here over the next couple months and decide whether there's a permanent improvement or not.

And Rick, just to clarify, the 80% of the increase in deactivation we've had from quarter to quarter, not of the total deactivation.

Our next question comes from the line of Lance Vitanza of TD Cohen.

Congratulations on the quarter. I guess my question is, with respect to AOL having ticked lower a little bit, is this just sort of what we'd expect from we're in this pre-launch phase, whether it's 5G or Galileo, I assume that that new customers or new potential customers are waiting, right? And so similar to the run up to the launch of AVANCE a few years back, it's tough to get new people over the goal line. And is that dynamic in play right now? Are we still seeing that happen? And do we expect that, is that possibly an issue as we think about a further delay in 5G? Do we think that that could actually pressure equipment sales not related to 5G, but could that pressure your existing sales going forward?

Yes, I mean, I think for a couple quarters we've been in a bit of a lull in the product cycle. And you see it in Apple watches, et cetera, the same thing where sales sort of slowdown of the old products as you move into new much better products. What we've tried to do is make AVANCE L5 a natural stepping stone to 5G in Galileo. And that's working to some extent. I mean, we've obviously had great equipment sales of L5s this quarter, and all of that has been, well not all, but almost all of that has been, people say, okay, great, I'll be ready to go to Galileo or 5G if I install that box because if you go into Galileo, you don't need to change the box. If you're going to 5G, you just replace the L5 with exact replica form factor called the LX5 which has the 5G functionality in it. So they're both very easy upgrades, and that is working for us to some extent. And that was why we got the fleet pull through for NetJets, and that's where we got this acceleration of OEM orders. So we'll see if that persists. It would be nice if it did, but we're not counting on it right now, and we're not factoring that into our guidance at all.

And then the last one for me is just on the share repurchases and looking ahead you've got I guess most of the cash flow for the year has already come in. Does that suggest that we're sort of done with your share repurchases for the time being or given that you have cash on the balance sheet, is that still something that we at least in theory could potentially see going forward as well?

I think it's something you could potentially see going forward. We've got a $50 million repurchase program approved by the Board. We have an investment committee that takes it $10 million at a time. We've spent about $25 million at this point.

Well, I mean, as you said, we're continuing to look at that, we'll assess the share price and that we'll look at that opportunistically but we also want to balance that with the head step down too and understanding whether or not we would pay down debt.

Yes. And the Board will look at whatever they think is best for shareholders and that's the way we'll go.

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

Oak, you indicated that you expect to begin shipping the HDX antenna in the fourth quarter. When should we expect the first STCs to be received? And will your STC schedule remain roughly a year behind Starlink's STC schedule in the business jet market or do you expect to narrow that gap?

Well, we're better at getting STCs than they are, and so we'll get a lot of STCs in a hurry. And that's I noted the number that we're in work already in my script. You have to get to your first article, STC before you can get PMA. So I think I said we were going to get PMA in Q4, so we'll have our first article STC before that. And then we work hard with -- know how to work with dealers on STCs so that they are ready to go when we are ready to go. And so we will have a lot of them pre-primed. And I would guess we'd have several, maybe even before the end of the fourth quarter, and certainly a lot of them in the first quarter next year. So this is one of the things we do really well. It's very peculiar to our little industry and it's something that Starlink is learning the hard way.

So you do expect to narrow the gap then?

Yes. And as far as 5G goes, I mean, we've been really smart about that whole STC program which is why there are so many aircraft in North America that will be covered almost immediately after we launch, because we've actually got first article STC and PMA on an LX5 box already with a 4G chip in it. So all we need to do with that to get those STCs kind of up and running immediately is substitute the 5G chip and do a minor modification to the STCs that are already done. And then those STCs -- and that those will get quite rapid FAA approval because if it's a minor [ audit ] it's a week or 2 and then we'll be ready to fly with 5G on a whole lot of planes too, so.

And another 2-parter along the same Starlink theme. There was a Bloomberg article about the Starlink service quality on a Delta Airlines trial that suffered from quality issues because of Starlink sharing their aviation network with the residential network in the channel. Are you hearing if that is a customer concern? And also on this Starlink theme, are you hearing whether the $2,000 per month price plan is resonating, and do customers think that is just introductory pricing similar to what Comcast Xfinity does, or do they think that's actually sustainable?

Let's start with the $2,000 plan. I mean, that's just a bucket plan, right? So you pay a minimum of $2,000 and then you pay another a $100 per gig. We've got bucket plans, we know them well. What happens generally is that people go over the bucket and pay a lot more for the plan than they anticipated. And with these very powerful antennas like Starlink, and we are bringing out, you're going to consume a whole lot of data. So that first 20 gigs is going to go pretty quick. And people will end up spending a lot more than they planned. And owners in this space typically do not like spending more than they planned. So they opt for unlimited plans generally. So today 80% of our aircraft are on unlimited or fleet plans, which are very similar to unlimited, and only 13% are on bucket plans. And also just given what we're projecting for usage, we think if people on that plan, they'll actually spend more than the $10,000 for the unlimited. So that doesn't concern us very much, to be honest. And we'll have sort of aggressive plans like that too. But that doesn't mean that that's what the ARPU is, right? The ARPU is going to be a lot higher. Your other question Starlink contention, it is an issue. I mean, I've flown Starlink down the Eastern seaboard. I got between 16 megabits per second and 135 megabits per second. It was still good. The latency improvement that we will have, and they have makes a huge difference in your perception of speed, to be honest. So I'll give them credit for that. But there is for all of us, it depends on which Starling satellite you get on, you could have a lot…

You are very in the weeds on that.

Sadly, I could go a lot further in the weeds.

Yes. And one for Jessi. Jessi, if the 5G network is delayed, does that mean that some of the 5G costs that you're anticipating for the second half of this year will be pushed into 2025 and that would imply that you would raise your EBITDA guidance?

Well, so I said that we would evaluate once we understood the exact timing, but potentially, the impacts would be on OpEx and CapEx pushed out which would positively impact EBITDA and free cash flow. But the specific value of what that would be we don't know yet. And one of the things, I mean, Oak had talked about doing flight testing, we're continuing to do flight testing, so there still will be spending it's just that particular milestones may get pushed out. So we'll have to evaluate that and come back.

And with those milestones, there would be the milestone payments and so that would be deferred, right?

That's right.

I would now like to turn the conference back to William Davis for closing remarks. Sir?

Thank you everyone for joining our first quarter earnings call. This concludes our call. You may disconnect.

This concludes today's conference call. Thank you for participating. You may now disconnect.