Good day and thank you for standing by. Welcome to the Third Quarter 2024 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 today's conference is being recorded. I would now like to hand the conference over to your speaker today, Will Davis. Please go ahead.

Thank you, Kevin and good morning, everyone. Welcome to Gogo's third quarter of 2024 earnings conference call. Joining me today to talk about our results are Oakleigh Thorne, Chairman and CEO; Jesse 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 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 November 5, 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 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'll 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 2024 call. Gogo delivered improved performance in the third quarter but far from the robust growth we've had in the past and far from the growth we think we'll drive in the near future in what remains a highly unpenetrated global business aviation connectivity market. This is largely because many of our current products are late in their product life cycle. Fortunately, several years ago, we began investing in a new generation of products, our Gogo Galileo Low-Earth-Orbit satellite product and our Gogo 5G product that will soon hit the market. And based on the overwhelmingly positive customer response we've received now -- we're receiving now, we believe we will reaccelerate our growth. And we anticipate this acceleration will be significantly augmented by our planned acquisition of Satcom Direct. Leveraging their attractive installed base, their strong sales and service organization outside North America and their strong position in the MilGov market. With such a full and innovative pipeline and robust business combination, it's an exciting time at Gogo and Satcom Direct. I remain inspired by and grateful for both the outstanding Gogo and Satcom teams who are moving quickly to build a world-class competitor in an increasingly competitive industry. Combined with Satcom Direct, Gogo will be able to serve every segment of the BA market with the very best solutions for that segment. From our proprietary air-to-ground networks, including Gogo 5G that deliver excellent, reliable and cost-effective connectivity for the thousands of aircraft that fly regionally in North America to integrated multi-orbit LEO/GEO solutions to meet the high bandwidth, high reliability and white glove service needs of the most demanding global heavy jet customer. This morning, I'm going to start by highlighting some demand trends we're seeing in the BA market that underpin…

Thanks, Oak and good morning, everyone. Gogo generated better-than-expected third quarter results across the board due to higher service revenue and a shift in timing of strategic spending that led to an increase in our 2024 financial guidance. In my remarks today, I'll start by walking through Gogo's third 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 improved 2024 guidance. As mentioned in our press release, in light of the pending acquisition of Satcom Direct, we are withdrawing our multiyear long-term financial targets previously provided on our second quarter earnings call. For the third quarter, Gogo's total revenue was $100.5 million, up 3% year-over-year and a slight decrease sequentially. Gogo delivered service revenue of $81.9 million, up 3% over the prior year and a slight decrease over the prior quarter. Our ATG aircraft online was 7,016, a 2% decrease year-over-year and a slight decline sequentially. This exceeded our internal expectations as a result of more new activations and fewer classic deactivations than we had anticipated at this stage in our product life cycle. Total AVANCE aircraft online grew to 4,379, an increase of 16% year-over-year and 4% sequentially and now comprises 62% of our total fleet. We saw record AVANCE upgrades in the third quarter, reflecting our progress in driving penetration from Classic to AVANCE within our existing fleet. Converting our Classic base to AVANCE remains a priority and we expect these conversions to accelerate in 2025. This helped drive the sequential net increase in third quarter AVANCE aircraft online to 164, up 50% versus the 105 sequential increase in the second quarter. As previously mentioned, we anticipate the upgrade process and product life cycle dynamic will continue to put pressure on ATG aircraft…

[Operator Instructions] Our first question comes from Sebastiano Petti with JPMorgan.

While you have withdrawn the longer-term kind of guidance, Jesse, you just kind of touched on, just maybe a housekeeping question. I mean, is there any reason to think that -- so maybe said differently, so if the transaction will be accretive kind of day 1, your previous guidance on a stand-alone basis was, call it, $150 million of free cash flow for next year. I mean, is there anything -- any reason or any maybe timing-related items that might shift that pro forma free cash flow number one way or another? Just trying to unpack as to maybe why that might not necessarily still be a good target as we think about next year. And then another question, I think the -- just taking a step back, just thinking about Gogo's strategic fit in Avionics longer term, particularly in the light of the SATCOM Direct acquisition. I mean, help us think through maybe again the rationale there. I mean, the Satcom Direct deal, particularly as you think about the competitive positioning from GEO offerings. And with that, specifically, Gogo is moving into new segments, LEO-based but it seems -- but you're also kind of now confronting competitors that you maybe not necessarily had to deal with in the past, some of the more established GEO guys. I mean does that impact how you're thinking about the pricing and margin levers of the business on a longer-term basis?

So well, Jesse answer the first part of your question and I'll take the second.

Okay. So a couple of things, Sebastiano, that is going to be changing for 2025 free cash flow from the Q2, the targeting $150 million next year. So for Gogo stand-alone -- well and actually for the combination, a few things are going on. So one, through this acquisition or due to this acquisition, we are taking on more debt. So that will be increasing the interest expense impacting our free cash flow. So that's due to the combination. But with regards to Gogo stand-alone, a few things are going on. So we will have more equipment revenue next year. And with the demand of HDX that we're seeing, that's probably going to increase even more and that's going to have just -- equipment revenue in general is going to have lower margin. We also are going to be very competitive in terms of our equipment pricing and have introduced some incentive programs as well that's going to be impacting the free cash flow next year. And then as we go through and some of the timing shifts with regards to FCC, that also impacts next year. And then as mentioned, some of the benefit we're seeing this year with OpEx and CapEx pushing out for our programs into 2025, that also will have a negative impact into 2025 next year. But as the companies come together, obviously, we will have to work through integrated business plan and work through what our impacts are expected with regards to 2025.

Thanks, Jess. I guess, Sebastiano, in answering your question, Ironically, I would say this deal for us is all about LEO, not GEO. And you'd say, well, yes but they're a GEO company. But you have to look at is their distribution channel and the verticals they serve and how that plays into LEO connectivity. So first of all, the 1,300 customers they have today and their ability to provide the right kind of service to the large jet, 7,000 intercontinental kind of jets that are very lucrative customers, we think gives us ability to actually upgrade those 1,300 by adding LEO. We think many will keep GEO because at the kind of expense they have and their demand for connectivity, they want to add both capacity that LEO and GEO together can provide as well as to have the redundancy that GEO can provide. But for us, it's all about adding that LEO sale on top of those 1,300 and expanding that within that segment which Satcom knows how to serve really very well. Second, in the MilGov market, where they're really growing quickly right now. We think that our LEO product, again, is a great add-on to the GEO. And in the military, there's really going to be -- they're really going to desire to have both because of the whole PACE concept which is that you need to have primary alternative contingency and emergency connectivity. So again, we -- as we look at this and build our business case, it wasn't really around keeping the 1,300 as GEO customers. It was about moving those to LEO. And if we didn't keep any on GEO, the business case closed but we think we'll actually have the opportunity to keep a lot of them on there. Beyond that, GEO connectivity is improving rapidly. And over the next year or 2, GEO speeds will achieve 100 megabits per second. You'll still have the latency issues but that's going to be a pretty good backup system and a really nice way to augment LEO connectivity. So we do think that a lot of people will elect to keep it. So, I don't know if that answers your question in terms of the competition but it's how we looked at the deal. And again, I'd say it's primarily about driving growth of our LEO products and keeping the GEO is a nice to have. It's sort of an incremental benefit.

That's helpful. Jesse, a quick follow-up just on the equipment pricing, just going back to the free cash flow pieces. And so in regards to the demand of HDX, are you just thinking -- does that mean maybe the working capital tailwind that from the buildup of inventory this year because demand is so great that that's less of a tailwind next year? Or is it more of a -- maybe there's a little bit of just given your competitive pricing, maybe that's kind of what you were inferring in terms of the lower.

Yes, that's right. I was talking about the competitive pricing. So while our demand will increase revenue and you'll have that benefit, it won't necessarily flow through to the bottom line for EBITDA and free cash flow due to the pricing.

[Operator Instructions] Our next question comes from Rick Prentiss with Raymond James.

I want to follow up on some of Sebastian's questions. First, time frame to closing. You're saying year-end. Obviously, it's a fast one, it's a private company. But walk us through long poles in the tent to get it done. Is this a year-end closing? Is it earlier than that? Just kind of thinking when should we think of this deal getting closed?

Yes. We're hoping for having it closed at the beginning of December. It could -- obviously, anything, it could drag longer. A couple of different tracks. Obviously, there's the commercial consent track. All the required significant commercial consents have been obtained. In terms of filings, we don't have a lot in this deal. Obviously, we've got DOJ. We filed -- we just refiled a few days ago. So there's a new 30-day ticker that started I don't know, last week sometime. If we get through in another 30 days, we should be able to close at beginning of December. CMA in U.K., they've asked a few questions. But so far, that looks like it's moving along reasonably well and that would actually -- on the current time line would be cleared before the DOJ would. We've got a foreign direct investment filing in Canada. So far, we haven't heard from Canada. That expires mid-November if we don't hear from them. And then we've got a filing in Saudi Arabia which we think probably also done by the end of November at this stage. So those are the regulatory hurdles. Financing is done. That's complete. So we are -- we've committed financing, so that's closed. And then we're working very hard on integration so that we can hit the ground running day 1. We've got 11 integration teams working on different functional areas of the company. And we think it's a lot of work to be done but we're going to be ready to go when we close.

Okay. Obviously, the margins are less. It's a reseller, so they don't have their own network. So no surprise that margins are less but driving for better revenues and cash flows. But it does seem like and I get the law of large numbers impact but the previous guidance for stand-alone Gogo was 15% to 17% revenue growth and now the combined company is 10%. How should we think about was that just the large numbers? Was that bringing Satcom Direct end that pulls it down? Help us kind of unpack kind of what causes that stand-alone 15% to 17% to go down to 10% longer term.

Actually, yes. I mean, stand-alone Gogo is still at 15% to 17%. And so what's bringing it down is us just, I think, being cautious about what's going to happen with GEO connectivity. And we haven't -- we're not yet a combined company, so we can't go through all the detailed planning that we'd like to before we step out with revised guidance. We'll do that after we close and we'll update people at that time.

All right. So are we thinking that if we do get a December closing, there could be revised guidance in the month of December before we get into the earnings cycle?

No, I wouldn't think it's going to be that quick. And I'll tell you, Rick, we're going through a very deliberate and organized integration planning process. And so we're actually going to get the planning done before we do the numbers so that we actually are planning something that's real. So we'll probably provide that guidance more likely on our Q4 earnings call. And then that will be '25 guidance. And then shortly thereafter, we'll come out with revised long-term guidance.

Okay, makes sense. And then, Jesse, I think you mentioned, obviously, the financing of the deal is a little different, $250 million term, $25 million cash on hand. Now you mentioned the SpaceX Starlink, United one. Was that pressuring the debt markets? Or maybe elaborate a little bit more on the change in the financing of the transaction?

Yes. So we previously stated that -- and let me just be clear because it's not just -- it's not $25 million of cash. Obviously, it's $25 million more in cash to be able to [indiscernible]. But we were targeting $225 million initially. And as mentioned, right at the time that we were kind of going into the market is when the United Airlines and Starlink announcement came out, that did put pressure -- you see where our second -- our current loan is trading down. So it really was the right mix for us to be able to put more cash because we have the ability to do that in our balance sheet to put more cash upfront and have less on the debt markets. It allows us to have better financial terms for the deal than what we thought we would have gotten. So that was the best way to proceed.

I just want to add -- sorry, Rick, let me just add, we were trading at par...

Yes, what’s a par [ph]?

And then United Starlink gets announced which has, if anything, benefits our revenue and our bond trades off to $94 which is crazy. First of all, we do supply Intelsat with ATG connectivity for the regional jets at United. However, in our models, we've taken all that regional jet revenue that we received down to 0. And all the guidance we've given over the last several years, it goes to 0 in 2026. And we've never counted on that revenue. So frankly, the announcement of that deal will probably not get United jets, regional jets moved in 2025 and we may have United revenue actually in 2026. So it would actually improve our numbers. So I just think the market is confused. We don't serve commercial airlines anymore. We don't have anything to do with it and to trade our bonds off from $100 to $94 just seems insane but it happened and it's too bad. So our debt is going to be a little more expensive than we wanted it to be.

Got you. Last one for me is purely selfish. Obviously, from a modeling standpoint, Satcom Direct is a private company. How should we think about getting historicals quarterly information to help make the modeling better as we look for '25 to be a year with them in the numbers as well as stand-alone Gogo?

Well, when the deal closes, just per the SEC requirements, there will be financials provided in terms of their stand-alone financials. So that will be disclosed as part of normal SEC requirements. And we did provide some historical -- very high-level historical. I believe it's on our Investor Relations website as we were going through the financing process as well. So we disclosed that information as well.

Our next question comes from Scott Searle with ROTH Capital Partners.

Just quickly, on the AOL number, I thought you had some comments. It doesn't sound like AOL was down as much as expected and you're starting to see some reactivations as customers have gone into suspensions. I'm wondering if you could comment on that. Are we through kind of the worst of it, I'll call it, the organic suspension cycle? And also on the Galileo front, you had some comments about your expectations doubling in 2025. Look, with Satcom Direct, with the dealer channel that you've been building with the STCs now, I think, addressing 18,000 aircraft. Could you calibrate us in terms of what that doubling is kind of your expectations in '25? And what kind of constitutes success for HGX and FDX in '25 and '26? And I have one follow-up.

Sure. Let me take the first one, Scott. So on the AOL, yes, it became -- the decline was better than what we anticipated. We did have higher new activations for the quarter than we had expected which was good. Obviously, not back to the levels that we had last year but still better than last quarter. And then the classic deactivations came in lower than we expected as well. So it was a good quarter for us. The reactivations have been fairly steady. We haven't seen too much change in that. That's been fairly steady all year long. For next quarter, I mean, in terms of just our own forecasting, we're more conservative. We kind of look at the last 6 months average. So we're expecting that it won't be necessarily as good. It's hard for us to predict. Obviously, we would hope that it continues on the same path as Q3 and that would be a good upside for us.

Yes. But current projections would have half good quarter, half bad quarter in...

It's coming down more in terms of our current projections only from how we do that modeling.

Yes. So -- and then on the Galileo piece, yes, I think we shared at some point that we expected about 200 shipments in 2025. And I think we're looking at probably more than -- well, we're doubling that in terms of our projection right now for '25. Remember, that's shipments, not units online. What happens is we'll start shipping to dealers right at the end of December, the STC dealers, they'll develop STCs. They will start taking more orders as they're developing their STCs for the models they're developing STCs for and that will ramp over the year. But the demand is unbelievable. I think the market is so happy to have all the talk with Starlink for quite a while in the LEO world and all of a sudden, there's a home team player, Gogo with a LEO product that's real and it's coming out and they've been able to taste it and experience it and the response has just been overwhelming. So we're very, very positive about where that's going to go. And frankly, we see some vectors that could drive that 400 up. So more to come.

And lastly, if I could, just on the Satcom Direct demand, talking about the overlap with LEO and GEO. I'm wondering, does that extend beyond the existing SATCOM Direct installed base today of GEO customers. You guys are unique in that you're going to be the only provider out there with the GEO LEO solution. So is that just within the existing base? Or does it extend to a number larger than that?

I think it extends to a number larger than that. Satcom developed 2 GEO satellite terminals, a Ka version and a Ku version. Ka is one -- is just coming out and the Ku has been out about 1.5 years. They are technologically superior to any other GEO antenna. I can tell you they've been -- last week, we were awarded a contract for line fit at a very large OEM. And we think that, that will provide a steady stream of units online. You're buying an $80 million jet what -- which IFC system do you want? I think half the time, the answer is going to be yes. They'll take them all. And so we think that will drive continued GEO growth actually. We'll see, obviously, there will be deterioration of the LEO base driven by moving to LEO but there will also be the steady drumbeat of units online coming off of line fit at the OEMs that will drive the number up. So we think it will be around for quite a long time. And yes, it will grow beyond the 1,300. The other thing that their presence in that large jet segment does is just give us an incredible number of relationships, tools, their software platform, everything else that's sort of tailored to that market segment. And we can package that with our LEO product and they can sell the hell out of that in the heavy jet market. So again, I think it's getting us a whole segment beyond the 1,300.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Will for any closing remarks.

This concludes the Gogo third quarter of 2024 conference call. Thank you for your participation and look forward to speaking with you soon. You may disconnect.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.