Good day! And welcome to the Gogo Inc’s Second Quarter Conference Call. At this time all participants are on a listen only mode. After the speakers presentation there will be a question and answer session. Instructions will be given at that time. As a reminder this call may be recorded. I would like to turn the call over to Will Davis, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning everyone. Welcome to Gogo's second quarter of 2024 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; 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 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 August 7, 2024. Any forward-looking statements that we make today are based on assumptions as of this date, and 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 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. The call is being broadcast on the Internet and available on the Investor Relations website at ir.gogoair.com. The earnings press release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It's now my great pleasure to turn the call over to Oakleigh.

Thanks Will. Good morning everyone and thanks for joining us today. Gogo's second quarter performance reflects the strength of our recurring cash-generative service revenue model. Even as we navigate a product lifecycle transition and continue to invest in bringing out our next generation Gogo Galileo LEO satellite product and our Gogo 5G North American air to ground product. Gogo is approaching an exciting inflection point in our product lineup. In the months ahead, we will have the most complete product portfolio in the business aviation IFC industry with products that offer the right performance, the right coverage, the right total cost of ownership and with great customer support for every segment of the highly unpenetrated 40,000 plus aircraft global business aviation market. We believe 5G and Galileo will accelerate our revenue growth beginning next year as they deliver order of magnitude improvements in the speed of Gogo service, expand our total addressable market by 60%, and extend customer lifetimes by providing easy and compelling upgrade paths for our AVANCE install base. It's worth noting that because of record upgrade activity in the second quarter, AVANCE now makes up 60% of Gogo's fleet. Consider every AVANCE installation a strategic win because it provides that customers with easier and cheaper paths to upgrade to new technologies like 5G and LEO with Gogo today and new network technologies in the future rather than to move to another connectivity provider. As we get close to launch, we're seeing our aftermarket customers adjust their purchasing behavior in anticipation of the Gogo 5G and Galileo products. This dynamic is reflected in our second quarter equipment revenue and in our revised guidance expectations for 2024. This customer behavior isn't unique to Gogo. It's typical of what you see at other companies as they launch next generation products.…

[Technical Difficulty]. Service revenue and solid free cash flow in the second quarter. We believe our performance continues to demonstrate the strength of our core business, fueled by recurring service revenue as we invest in our new products, Gogo 5G and Galileo. With the pull-in of OEM equipment orders and timing shift of expenses, which resulted in high adjustability EBITDA in the first quarter, our second quarter adjustability EBITDA declined sequentially, but was ahead of expectations. We continue to believe the 2024 is the trough year for our growth and profitability within our long-term plan extending through 2028. As the majority of our current strategic investments wrap by early 2025, we continue to target a significant acceleration in our free cash flow in 2025. In my remarks today, I'll start by walking through Gogo's second quarter financial performance, then I will turn to our balance sheet and capital allocation priorities, and finally, I'll conclude with additional context on our revised 2024 guidance and long-term targets, which now reflect the currently expected timing for Gogo 5G launch. For the second quarter, Gogo's total revenue was $102.1 million, a decrease of about 1% year-over-year and 2% sequentially, driven by a decline in equipment revenue. Gogo delivered record service revenue of $81.9 million, up 4% over the prior year, and just slightly higher than in the first quarter. Our ATG aircraft online was 7,031, a 0.5% decline year-over-year, and down 1% sequentially. The quarterly decline was driven by higher CLASSIC deactivations and lower new activations. Due to, as Oak mentioned, the product lifecycle dynamic we are experiencing as customers defer purchases in anticipation of the launch of Gogo 5G and Galileo. Total AVANCE aircraft online grew to 4,215, an increase of 17% year-over-year and 3% sequentially, and now comprised of 60% of our…

Thank you. [Operator Instructions]. Our first question comes from Sebastiano Petti with JP Morgan. Your line is open.

Hi. Thanks for taking the question. I was hoping you could help us maybe think about expected ARPUs or price points as it relates to Galileo? And then maybe kind of stepping back, 5G being a bit delayed here, but more broadly, any help on helping us think about the 5G pricing strategy that we should be thinking about as it pertains to next year and the long-term revenue guidance? Thank you.

Sorry, everybody. I was on mute. So, generally 5G ARPU would be about $2,000 on average, higher than our current ARPU. Then the HDX and FDX would be priced at higher price points. I don't know that we've shared the average ARPU yet, but you can actually see the pricing on our website now. So, they were reflecting greater coverage around the world and reflecting higher bandwidth. HDX and FDX are priced at premiums to 5G.

Okay. And if I could maybe just – oh, sorry.

Jesse, I don't know if you want to go into any more detail in terms of the exact ARPU we're projecting for those.

Well, obviously, it depends upon a range, depending upon the plan that we would be providing, but we are expecting an increase in ARPU as Galileo starts to take off. As a reminder though, I mean in 2025 we won't necessarily see that much impact with regards to the service revenue. It will be more of the equipment revenue, and then you will see the service revenue really start to take off more in 2026.

Got it. Thank you. And a quick follow-up. Just thinking about AVANCE, can you help us think about the new planes online, between maybe a migration perspective or net new customer standpoint? Just trying to think about the drivers there behind the nice increase we saw. Thank you.

Jesse, do you want to go into the activations?

Yeah. I mean, so this year we have been and in this quarter we noted, our units online was impacted by lower new activations than what we were expecting, and that is due to the product lifecycle dynamic that we talked about. We also had the higher deactivation. And I think that our expectation for the rest of the year is that will continue. But then come next year, we would expect, obviously with the launch of these two products, that our new activations would accelerate, as well as being able to kind of neutralize our net deactivation rate.

Thank you.

Thank you. Our next question comes from Ric Prentiss with Raymond James. Your line is open.

Thanks. Good morning, everybody.

Hey Rick. How are you doing?

Hey, got a couple questions. Obviously, you've called out a couple times the customer behavior while they pause for the new stuff to come in. How many aircraft are you expecting, ADG aircraft, are you expecting as you look through the rest of this year into, let's say, second quarter next year?

Jesse can get into the more precise numbers. I think we expect that a little bit more degradation in the total units online count until we get our new products launched.

That's right.

So if you had 105 aircraft net on 2Q, that same kind of magnitude, 100 each quarter or does it accelerate from there?

No. I mean, we're not anticipating it to reach, hopefully reach those levels, but there will be some deterioration, but not necessarily up to the 100.

Okay. So more coming off, but maybe not the pacing you saw in 2Q.

That's right. And as a reminder, in Q1, we had that unique situation in Q1 with the hourly deactivation.

Okay. You've called out a couple of times, I think, the vendor financing hitting some costs out. Give us a little color on that. What's happening there, and what kind of costs are being incurred?

Yeah. So in general, the legal expenses were very high in the quarter, so I wanted to highlight that, inflating our G&A expense. But with regards to the vendor financing issues, as noted, we had an investment in a convertible note in Q1 and Q2, and so the activity for that, the legal support of that, which is not normal business, that was one area. And then also in our 10-Q, you'll see a disclosure around the supporting a revolver commitment for Airspan. That is not necessarily effective until Airspan emerges from bankruptcy, but we have partnered with Fortress to support a revolver, and there's legal support for that as well. So we're really supporting our vendors in this and its unusual activities, so we wanted to kind of call out that unique spend.

Got you, right. Okay. Yeah, I mean, in the case of Airspan, they went through a prepackaged bankruptcy, of course, so we ought – when that happens, you also have to spend money making sure that you defend your existing rights and your contracts, etc. So it was both, that we helped in terms of helping them with some financing to get through it all, but we also had to protect ourselves.

Okay. And the last one for me, following on Sebastiano’s question. Obviously you've got the pricing on the website for the Galileo. Oak, you make a point about your network, your bandwidth, your customer service and customer support. What kind of anecdotal or outright detail do you have as far as how are customers valuing price versus coverage versus customer service?

You mean on a relative basis to each other?

Yeah.

Yeah. I mean, I think that customers do value having a relationship with somebody that they can trust, who they've been doing business with for a long time, who has a very responsive customer support, has been very consistent in terms of how they price and the customer feels that they can count on. I think that's probably the highest value of anything. And when you look at the products themselves, our network, and our network will perform about the same as StarLink's frankly, and I think ours will be more stable and reliable in terms of being pinned to a higher mean connectivity rate. So I think that'll be valued by customers. And then the equipment side, we manufacture equipment that can be put anywhere in the aircraft, inside the pressure vessel, outside the pressure vessel. It doesn't require any maintenance, etc., etc. You know StarLink's is consumer grade. It's what you would have in your home. That's what – it's not going to – it’s going to work for a while, but it's going to be a question about how long it's really going to be reliable and how long it can withstand the rigors of business aviation in terms of planes that go from 130 degrees inside the cabin before the passengers arrive to minus 60 at 40,000 feet. So there's reasons we build equipment aviation grade and they really, they haven't done that. So I think there's a million little things that are kind of wrong about how they are going at things, but right now people that have had it installed are using it and they are liking it a lot, because it's a much better experience than any of the current IFC products out there. In a way that kind of helps us. We don't have to be – I don't think we have to be crusaders for LEO. I think people in the market are already seeing that LEO is a real improvement. So, I think in the end that kind of helps us and I think then we'll win with all those little differentiators around service, aviation grade, our aviation focus that will sway a lot of the market towards our products.

Right. The last one for me is, the 5G launch now 2Q. Are we thinking early 2Q, mid 2Q’25, late 2Q’25 and what else might cause that to be at risk?

Well, I would say mid 2Q right now. A lot of the risk we will be able to retire or have been retiring, frankly, in two ways. One is our FPGA flights, where we've got all the chip software loaded on an FPGA that we're flying with. That's done a couple of things. First of all, it was one of the ways that we identified some of the issues that our chip provider has to provide. So, we've got to those early before they cause problems, after coming out of fabrication a year down the line or whatever. And second of all, that allowed us to validate our own software model of our network, which means that we can actually continue to test virtually now, and we are, and that will identify a lot of issues inside the network as well before we ever even get the chip. So those two things help a great deal. There's still some risk around the actual chip fabrication, which is slotted to begin early in September. And once it comes out, there will be some bringing up risk. So with the amount of scrutiny that's been paid to this chip at this point, I'd be shocked if there was a problem when it came out.

Great. Thanks everybody.

Thanks Rick.

Thank you, Rick.

Our next question comes from Scott Searle with Roth Capital Partners. Your line is open.

Hey, good morning. Thanks for taking the questions. Hey, good morning, Oak. Hey, a quick clarification for Jesse. Legal expenses were relatively high this quarter. I'm wondering what you are thinking about and factoring into your expectations in the second half of this year. And if you could remind us what they were in the first quarter. And then Oak, to follow-up on Rick's question around 5G, it seems like your comfort level of this launch in mid-second quarter is a lot higher than we had in prior conversations. I'm wondering if you could walk us through the steps and the milestones here. It sounds like now you are expecting chip delivery in September. Is there a new spin on that chip? I was wondering if you could just kind of lay out some of the milestones that we should expect over the next couple of quarters.

Yes, I can take the first one. The legal expenses, it was $9.5 million, and that was across litigation expenses, as well as the vendor financing we spoke about and also global expansion, just kind of our normal efforts that we're doing for global expansion. We do expect that to decrease. There was a bit of a high point in Q2, so we'll not be at that level of magnitude going forward in Q3 and Q4.

Okay, and then Scott, for milestones, I didn't say the chip would be delivered in September. It said it starts fabrication in September, so that's one milestone. Then coming out of fabrication is another. Bring up is a third, when they complete bring up, and then ship chips to us, and so arrival of chips with us would be another milestone. Obviously, we will install it and start flight testing with it right away. And then it really gets to PMA and STC, which are regulatory. PMA is regulatory and the STC is in terms of approvals for your aircraft getting done. I think those are the main milestones going forward.

Great. And lastly if I could, in terms of the competitive landscape, I was wondering if you could just give us an update on that front. We don't hear a lot about SmartSky. I'm wondering where they fit into the equation. And then specifically on StarLink, while they will be a competitor going forward, given their presence, given their network, there's been a lot of talk recently about the mini kind of factoring in somehow into the equation. I'm wondering if you could address specifically that issue in terms of FAA regulatory issues around something like that, in terms of that creeping into the market and/or impacting pricing. Thanks.

Well, SmartSky is really not a factor in the market at this point. They haven't – I'll just put it this way, I don't think they have any revenue generating customers. In terms of the litigation with us, we think that case in many ways is basically over at this point. As you might recall, Scott, there were two sets of patents, one set that expired in the 2030’s and one set of patents that expires in August of this year. In Discovery, and one of the reasons our legal expenses are so high is that Discovery ended up being quite extensive. We had four times as many documents to review as we had anticipated in initially budgeting for Discovery. However, in that Discovery, it was discovered that SmartSky knew about prior art to the patents that are expiring in 2030 and that they did not reveal that prior art to the patent trademark office. That has raised a very significant equitable conduct issue for them and will most likely lead to those patents being determined to be invalid. You might recall that we have often said that we thought they didn't have any valid patents that we infringed on and this is the reason why. So that, I think, eliminates frankly the risk of those long-term patents being an issue. Then the short-term ones, we have always did not infringe on patents. We think we will win on that. However, even if by some miracle we were to lose, 5G is not coming out until May now and those patents expire in August. So there’s not going to be a whole lot of damages in terms of the impacts on us. So, that's SmartSky. The mini, look, there’s all kinds of little toys people use in business aviation –…

Great, very helpful. Thanks Oak.

Thank you. Our next question comes from Simon Flannery with Morgan Stanley. Your line is open.

Great. Thanks a lot. Good morning. To start off, just on the churn or the DX, I think in the past we've had them waiting for maintenance upgrades and so forth. Are any of these customers churning to competitors or where are these aircraft going?

We have seen a little bit of churn to competitors, Simon. We had 11 that left us for a KA solution.

Like a Viasat or something?

Yeah, and then we had 10 that we think left us for StarLink, that told us they left us for StarLink. So there's a bit of that on the margin there.

Okay, and you'd expect that to continue through the balance of the year, until we get these products out?

I would, yeah, I think that that will. I think the good news behind those numbers is that it's happening because people have tremendous demand for connectivity. And I think, as I talk to flight departments and the like, especially for larger companies, the issue is that now with all the file sharing going on and everybody's spreadsheets live in the cloud, they don't live on their PC. It's just putting a huge strain on older products like our older products, and frankly, a lot of the older GEO products as well. And then you've got multiple video conferences going on on the aircraft at the same time. So that’s all – those are all applications that LEO is going to support really well. And so I think we're fortunate that we're going to be well positioned to serve those, and I think we'll be very competitive. But StarLink's there first with the solution and so they are getting a lot of attention at the high end of the market right now. I think we'll see some pressure there until we get our FTX antenna out.

Okay, and you talked before about StarLink having a smaller antenna. Do you think the Mini is that antenna, or do you think they are working on another smaller antenna that's going to be more suited to business aviation?

I'm not sure the Mini is that solution, but I also don't get the impression right now they are working on a smaller one for business aviation. I think they feel like they can fit this colossal antenna they've got on smaller aircraft, and they are going to try and FTC them on those aircraft. You can put an antenna on anything, but it looks like an AWACS, and you have a smaller antenna. You've got to move a lot of other stuff on top of the aircraft when you install it, which drives up installation costs. There's a lot of inconveniences to it, so we think that our – FTX in particular, which is the antenna that will compete with StarLink. It's our larger antenna, still much smaller than their antenna. It's going to be suitable for a lot more aircraft than their very large one. But my point there was only that I think that they may think they are okay with just the big one right now.

Got it. And then maybe you could talk a little bit about OneWeb. I think they had faced some delays before. Any updates on their network status in terms of being able to support your timeline on Galileo later this year. And I think it would be really helpful just to understand more about your contract with them and how the pricing works on your bandwidth consumption. Is it all sort of variable rate bit consumption, any volume discounts, things like that? Any color on margins and so forth to help us think about what happens at the bottom line from the revenue flow through?

Yeah. So we have said before that we have, I guess, traded off lowest price per megabyte for flexibility, because we need to be able to react quickly to pricing changes in the market. And we can't be in a position where we've got a floor price on an aircraft or something like that, that would cause us to not be able to have a margin on whatever we sell. So we haven't gone into much more detail than that, but I’ll just put it that way, that no matter what we end up selling a product for, we're going to have margin on it. So that's number one. The first part of your question again, Simon?

Yeah. Just about their network and their operational readiness to support Galileo.

Yeah. Their network, they are still rolling out some of their ground stations, but we feel good about where they are going to be when we launch at the end of this year. And so we feel good about that. They are also almost complete with upgrading the software and their network to handle aviation, so that's also in good shape. So we feel good about it.

Okay. And that allows you to give kind of QoS guarantees to your customers off their network?

Yeah. Yes, it does.

Simon, just one thing to add with regards to the margins. So we did indicate obviously, that the margins will be slightly lower than the very healthy, strong margins we have in ATG. However, when you look at our long-term model through 2028, we do still expect our service margins to start with a seven handle, even with the mix of Galileo.

Great. Thank you.

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

Hey Louie.

Jesse, Oak and Will, good morning.

Good morning. How are you doing?

Doing okay. The launch of HDX is a pivotal milestone for GoGo in this dynamic market. You mentioned your expectation to receive the Galileo HDX PMA in the fourth quarter. When do you expect to receive the STCs, and for the first customers to begin generating Galileo service revenue?

They'll start coming in first quarter, Louie.

Great. And those STCs and the PMA, that's a regulatory hurdle. Your Twitter account recently blogged how you had, I think, successful motion table testing with the HDX antenna. What are the major technical hurdles that remain, that could potentially delay receiving the PMA or just the general functionality of the antenna?

There's not a lot of technical risk with this technology, because this is not – like 5G, there's a whole new 5G chip being developed, which is where the risk has been and it's caused all of our issues. Right now, Hughes is already using different form factors of this antenna in aero, and so it's not unproven technology. The next step is, we finish installing our Challenger 300, which is happening right as we speak. It started in July. It should be done very shortly. Then we'll go into flight testing. The PMA process starts when you start developing a system. You've been in constant dialogue with the FAA for, in our case, a year plus in this. What they are trying to do in that is, is validate the authenticity of all the pieces and parts that go in there, to make sure that they are all aviation grade, as you originally stated they would be. That is something that I don't think has a lot of risk around it at this point. We're in touch with the FAA and proving to them that it's got the parts that we said it was going to have in there. So I don't think that that's going to be a huge risk. Then on the FTC side, once we start flying on the Challenger, I think we'd be able to show you can put it on a plane, you can fly it, and it works. So I don't think there's a ton of risk there, to be honest.

Great. And how far behind should the launch of the FDX be relative to the HDX, in terms of the launch?

Well, the FDX is, as we said, first half next year. I'll leave it at that on this call, and we'll give more details probably on the next call.

Great. And one final one for Jessie. If rip and replace funding is increased to cover your full $334 million, what would be the significance to your free cash flow generation in 2025 and 2026, potentially?

Right now, we've indicated that, one, we've mentioned that our current plans would not be to deliver all the way up to the $324 million. That was based off of our original application, so the total value has decreased a bit. But it would cover the negative hit that we're expecting in 2025 and 2026, but not all of it, because mainly there's probably going to be around $10 million or so that we would still need to spend in ‘25 that's not reimbursable. So that piece we would still need to cover. But then in 2026, it would fully cover everything that we would need to do there for the most part.

Great. And one final one, should service revenue stay flattish, even as aircrafts online trend lower over the next year? Like, you've recently had ARPA slightly pick up. Should that offset the decrease in aircrafts online, or how should we think about that?

Yeah. So I think that that's the expectation through next year, because again, we won't necessarily see an uplift from the new products coming in yet on service revenue. So they'll be either flattish to very modest growth next year.

Thanks everyone. We'll be looking forward to updates for the HDX on the Challenger as you do the flight testing over the next month.

All right. You bet. You bet. Thanks Louie.

Thank you.

Thank you. There are no further questions. I'd like to turn the call back over to Will Davis for a closing remark.

Thank you, everyone, for joining our second quarter earnings conference call. We look forward to talking with you soon. Thank you. You may disconnect.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.