Q1 2021 Gogo Inc Earnings Call
[music].
Hello, and good day to day since your conference Operator, today's conference is scheduled to begin shortly please continue to standby.
Again todays conference is scheduled to begin shortly please continue to standby.
Thank you for your patience.
[music].
Yeah.
Yeah.
Thank you R J and good morning, everyone. Welcome to go goes first quarter of 2021 earnings Conference call.
Joining me today to talk about our results are Oakley for President and CEO, Barry Row, an 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 in the future financial 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.
These risk factors are described in our earnings press release filed this morning and are more fully detailed under the risk factors in our annual report on for them 10-K and 10-Q.
And other documents, we have filed with the SEC.
In addition, please note that the date of this conference call is may 6th.
2021.
Any forward looking statements that we make today are based on assumptions as of the state.
We undertake no obligation to update these statements as a result of more information or future events.
During the call will present, both GAAP and non-GAAP financial mesh measures.
We've included a reconciliation an explanation of adjustments and other considerations of our non-GAAP measures.
For the most comparable GAAP measures and our first quarter earnings press release.
This call is being broadcast on the Internet and available on the Investor Relations section of the Gogo website at I R Dot Gogo Air Dot Com.
The earnings press release is also available on the website.
After management comments will host the Q&A session with the financial community only.
It is now my great pleasure to turn the call over to ugly.
Thanks, well and thank you off and joining us this morning and for your interest in Gogo.
The first quarter results, we announced today and the completion of a refinancing last week.
Thank God those strong momentum as we execute on our pure play business aviation connectivity strategy.
Today, My remarks will focus on highlights of our first quarter results.
Business Aviation strongly cover you from the depth of COVID-19.
Ah progress against the strategic initiatives I discussed on our last call and the impact of the refinancing on our business on a go for it basis.
So let me start with the results.
How about 11, a really strong first quarter driven by the ongoing recovery of the business aviation market and the strength of our Hearts platform.
We generated total Q1 revenue of $73.9 million up for per cent compared to Q1 2023.
Given by a three per cent increase in service revenue and a 10% increase in equipment revenue.
Per year, and we expected greatly exceed that number for 2021.
On another positive note pad.
We had very low equipment churn in the quarter getting an annualized 98.2% equipment retention rate, which equates to more than a 17 year revenue producing equipment life on an aircraft. This.
This is a significant recovery from our low point of 92.5% in Q2 of 2020.
We also too strong adjusted EBITDA and free cash flow performance for the quarter driven by robust equipment revenue disciplined cost controls and some delayed spending that will hit later in the year.
I'm very proud of the Gogo team and what we accomplished in the first quarter I think it's a harbinger of good things to come in the combination of a lot of hard work and strong execution over the past two years.
Now, let me turn to conditions in the business aviation market.
Clearly the pandemic is driven supportive trends in business aviation.
Pushing more flyers, who can afford it to fly private out of health concerns and accelerating the Uber vacation of air travel is more connected passengers turned to charter or Tom share models to access private aviation.
We view B, a flight activity as a proxy for demand.
As growth in flight activity ultimately drives demand for aircraft and that will drive demand for connectivity.
This is especially true in the corporate and fleet segments for passengers are insisting on quality connectivity, when making that purchase decisions.
In order to accurately assess growth in the industry today.
From pre COVID-19 times, we will compare 2021 flight of activity to 2019 activity.
For Q1, 2021 average daily Gogo flight activity ran at 97% of average daily flight activity for Q1 2019.
However that modest decline was really anchored by corporate for like Department, who are still well behind 2019 flight counts early in the year.
That all changed in March and April.
Corporate flight counts grew from around 70% of 2019 count from February February two 100% of 2019 accounts in March and 102 per cent in April.
Carter flights glued to 130% of 2019 counts in March and 128% in April and fractional flight school to 100, Google 130 per cent of 2019 in March and 136% in April.
This dramatic growth in demand has driven a surge in secondhand aircraft purchases, leaving inventory of for sale pre owned aircraft at an all time low.
It's called fleet operators to delay aircraft retirements.
And it's led very rapid that little wall Street analysts to raise their projections for OEM deliveries by 6% for this year and another 6% for next year.
Go go is uniquely positioned to take advantage of this opportunity for.
For line fit at all nine of the major business Aviation Oems.
We have a strong aftermarket network of 120 dealers that sell and install our systems.
And there are 93, stc's cover installing gogo equipment on more than 200 makes and models of aircraft far more than any other broadband IFC supplier to the da market.
The other day changed from to be a market is the change in passenger behavior.
The COVID-19 new normal has driven our end users to live and work online and they know require streaming video conference capabilities in flight as part of the work from anywhere culture.
This demand manifested itself from Q1 data consumption on Gogo equipped aircraft growing 44% from Q1, 2019, which translates into a 32% increase on a per aircraft basis, and which in turn should manifest itself and purchase of higher data service plans for the future.
[noise] Gogo as well positioned to meet this increased day to demand with events L. Five it's delivered faster speeds and and have enhanced network capacity in our for G. Atg Network L.
<unk> enables live streaming a video and audio video conferencing in other must have applications like VPN.
To make that demand more affordable, we just announced a new unlimited streaming a data plan gogo bids for G. Limitless available to our events L. Five customers, which allows customers and enjoy the benefits of streaming without the unpredictability of high Overages.
And Gogo five G well advanced our product offering even further by supporting multi device video streaming truly extending every capability of the remote office into the sky.
[laughter] based on the strength of our first quarter performance in the industry tailwind shaping the recovery of the business aviation market.
Gogo was raising our 2021 revenue and adjusted EBITDA outlook.
Of our <unk> base station antennas and prepare for <unk>.
Operations for Testbed installation later this year.
And we completed building a prototype five day aircard in preparation of full airborne equipment prototyping also later this year.
We're still on schedule for service launch in 2022.
As mentioned on our last call. We've had some production related delays associated with a particular <unk> semiconductor chip.
Our schedule takes into account the chip manufacturers current expectations on delivery timing and still project service launch will take place in 2022.
Our second strategic initiative is to drive penetration of our advanced platform.
It gives us the ability to integrate future technologies into our customers' existing advanced installation at a much lower cost than buying and installing similar products new from some other supplier.
In essence advanced future proof, our customers' investment in our hardware by enabling us to add new products, New service levels, New spectrum, and even new networks, primarily with software upgrades as opposed to expensive in aircraft hardware upgrades.
For example for Leo satellite networks, and ESA antennas company come available.
<unk> would have the option of offering advanced customers access to those networks simply by adding a new Esa antenna on top of the plane.
That antenna could plug into the existing advanced platform already installed inside the plane.
Much like a Tesla the rest of the Leo upgrade would be achieved for the simple software update to the advanced device already onboard.
Conversely, if a future competitor offers that same product the customer will have to rip out existing equipment and install new hardware inside the aircraft net cost to the customer of hundreds of thousands of dollars in weeks of downtime.
Gogo has not committed to a plan, but this demonstrates the type of Optionality, we get with a relatively modest investment on our part from the events from the advanced platform.
To make this point, even more clearly when we upgrade advance out five customers to five G. Most of the upgrade will be software only hardware needed will be one small box and two new antennas that fit exactly where the old intend to sit on the outside of the aircraft.
Needless to say, we're very bullish on events.
Flexibility to adopt and integrate new technologies as they evolve those competitive moats around our current market position.
Also gives us the ability to attack new markets outside of North America.
What was exciting about Q1 for example was it we grew units online 42% year over year to 1900 units for 32% of our total total aircraft online up from 23% in Q1 2020.
Our third strategic initiative is around supply chain and manufacturing.
Order to drive down costs and enhance quality, we simplify our supply chain by mandating common componentry across all advanced devices.
There is a low cost all three are fully featured el five or our future <unk>.
By mandating common componentry, we drive down the number of Skus, we need to source.
Thereby driving up the quantity we purchase of each SKU.
Then lowers unit costs and drives up quality by simplifying our inbound logistics and manufacturing.
This is proving especially valuable this year as we've been able to minimize supply chain risk in the face of a dramatic increase in demand during our global supply chain crisis.
Currently we feel that we have enough supply to meet our increasing demand for the next several quarters.
Let me finish on the refinancing from.
In early 2020, we outlined our value creation roadmap for Gogo.
It's focused on first managing our business through the severe impact of the COVID-19 pandemic.
Second completing the sale of the commercial aviation business and third executing a comprehensive refinancing to enhance our financial flexibility and position the new Gogo for growth.
With the closing of our refinancing last Friday, we've delivered on all three prongs of that plan.
Our refinancing was an overwhelming success, we achieved approximately $70 million a year in annual cash interest savings as opposed to the $50 million. We had originally targeted as.
The result of now having a clear picture of our debt service obligations given.
Given the strong performance of the business. We are now sharing long term free cash flow guidance for the first time and Barry will provide more detail on that guidance in just a moment.
There are several other very positive aspects of our refinancing that are worth noting.
First by borrowing the term loan b market, we achieved flexibility to refinance to delever or to pursue strategic transactions in the future as we see fit.
Second with 200 million of liquidity and our significantly enhanced cash our free cash flow will be able to invest in deepening and widening our competitive moats and in further delevering our balance sheet.
And third in Q3, we expect to achieve a major milestone when we turn net income and earnings per share positive for the first time.
And become my Dad would call a real company that is an exciting milestone for gogo.
Now, let me make a few concluding remarks.
First I'd like to welcome Mark Anderson of DTC or to our board and welcome <unk> as a partner in that Gogo business.
<unk> added tremendous value throughout our refinancing process, because they've had investments and other business aviation companies they bring valuable experience to our board.
Welcome Mark.
Last at Gogo, we are very excited about the opportunity ahead and ahead of us as we leverage our atg network, a leading innovative advanced platform and a strengthened balance sheet to drive growth and value creation for our employees, our customers and our shareholders.
That I will turn it over to Barry.
Thanks, Kirk and good morning, everyone.
In my remarks today I'll start by walking through Gogo as first quarter financial performance in more detail then I'll provide an update on our balance sheet. Following our comprehensive refinancing last week, which is a major milestone for gogo and sets us up for significant value creation going forward.
Finally, I'll finish up with some additional context around the updated 2021 guidance and long term targets, we announced this morning.
As Eric mentioned, the accelerating recovery in the business aviation market and our unique ability to capture that value drove strong first quarter results.
Total revenue of $73 $9 million increased 4% compared to the first quarter of 2020, driven by increases in both service and equipment revenue.
These results reflect the continuing recovery in the business aviation industry and strong sales of Gogo has advanced platform.
On a sequential basis total revenue decreased four 8% in the first quarter of this year.
We had strong growth in service revenue sequentially.
However, as expected equipment revenue declined following the record advanced shipments in the fourth quarter of 2020, driven by pent up demand promotional activity and general seasonality for equipment.
Let me break down the revenue progression between service and equipment.
We achieved record service revenue of $59 $4 million this quarter, an increase of nearly 3% compared to the prior year period, due primarily to a 3% increase in atg aircraft online.
And recognition of $1 $2 million in service revenue under the network sharing agreement with Intelsat.
As a reminder, we have a 10 year deal under which Intelsat has exclusive rights to our Atg network for commercial aviation subject to paying us at least $178 million in revenue share over the term.
We expect to generate increased revenue under this agreement over time.
On a sequential basis service revenue grew more than 4% due primarily to a 2% increase in atg aircraft online higher service revenue from the network sharing agreement with Intelsat.
And an increase in average monthly connectivity service revenue per atg, aircrafts online or <unk> from $3069 to $3 $85.
Overall, we're expecting <unk> to continue to rise throughout the year and exceed 2020 results for the full year 2021.
In the first quarter, new customer Activations as a percentage of total applications increased to pre COVID-19 levels of 65%.
Which is a positive indicator for the projected growth trajectory of our service revenue.
It's important to highlight that since emerging from the depths of the pandemic, we have seen consistent sequential growth in our subscription based service revenue.
This trend is key to a recurring revenue model and will be an important long term value driver.
Notably, we expect continued sequential service revenue growth throughout 2021.
Now, let me discuss equipment revenue.
We generated equipment revenue of $14 5 million from the first quarter, a 10% increase compared to the first quarter of 2020, driven by increased shipments of our advanced products.
As oak outlined driving penetration of the advanced platform into our installed base and with new customers as a centerpiece of our long term strategy.
It provides the foundation for our expectations of continuing growth in our service revenue annuity stream.
Looking forward, we expect the seasonality we have experienced over the past several years to persist with equipment revenue backend loaded to the second half of the year and strongest in Q4.
There are several factors that drive Q4 sales promotional activity and trade show timing are two contributors and we also found that some companies wait until the end of the year to get a sense of their financial position before making equipment investments.
That trend combined with our sizable backlog for purchase orders.
New orders received in the first quarter and other indicators give us confidence that 2021 equivalent revenue will grow at least 20% over 2020.
We've raised our 2021 revenue guidance to reflect these positive trends.
I will do a deeper dive into a full guidance update in a few minutes, but first let's focus on profitability.
As we outlined last quarter, we anticipate service margins to contract somewhat throughout 2021, mainly due to increased data center and network operations costs.
Some of these increased costs are transitional as it relates to the separation and migration activities. Following the sale of our commercial aviation business until zone.
As mentioned previously our service margin will also be modestly affected by the financial statement geography change with Intelsat revenue share being recorded in service revenue instead of cost of service.
While we experienced some of that anticipated contraction in the first quarter service margins remained strong at 76%.
And we expect this metric to remain in the mid 70% range over the longer term.
Equipment margins rose significantly on a sequential basis following the $2 $6 million inventory reserve that was recorded in Q4 2020.
We also saw improved product mix with higher margin <unk> shipments in Q1.
We don't expect this very high equipment margin to continue through 2021. However, we do expect equipment margins for the full year of 2021 to be above the 2020 levels.
In terms of operating expenses, we have been successful in beginning to adjust our cost structure to align with our smaller sized and more focused business.
In the first quarter, we saw significant decreases in G&A spending due to lower outside services and personnel expenses.
This drove a 26% year over year reduction in combined engineering design and development sales and marketing and G&A expenses as these expenses totaled $20 million for this quarter.
As we noted in our pre announcement filing in mid April this does reflect a delay in certain budgeted operating expenses totaling approximately $4 million that we expect to incur in future quarters.
Looking at operating expenses for the full year of 2021, we expect opex to grow from the low levels experienced in the first quarter of this year, reflecting financing and other expense growth in G&A increased <unk> spend that that program continues to ramp and modestly increasing sales and marketing expenses.
We continue to expect G&A expenses to be relatively flat for 2021% versus 2020, as we deliver on our obligations under the Intelsat.
Transition services agreements.
As we've said previously we expect to reduce G&A, excluding noncash stock based compensation by approximately $10 million by the end of 2022.
<unk> expenses, where some of the delayed costs that will be pushed out for the second quarter and later in the year.
We spent just $1 million in total external <unk> development and deployment costs in the first quarter.
Of which approximately 600000 was in Opex and the remainder in Capex.
We continue to expect to spend approximately $12 million in <unk> opex for external development and deployment in 2021 as reflected in our adjusted EBITDA guidance.
Although there could be some shifts between <unk> capex and opex for the balance of the year.
Yes.
Our bottom line performance for the first quarter was strong.
Gogo delivered adjusted EBITDA of $33 9 million, a 25% increase over the prior year period and up 76% from Q4 2020.
As a reminder, Q for 2020, adjusted EBITDA was negatively impacted by $10 million for the full year accrual for 2020 cash bonus expense as.
As well as the $2 6 million inventory reserve as we previously described.
Free cash flow for the quarter was $23 9 million a.
A 4% increase over the prior year period due to the increase in EBITDA.
Except by lower net working capital.
Free cash flow for the first quarter of 2021 increased by over $40 million from the fourth quarter of 2020 due to the interest payment in Q4.
We expect free cash flow to be negative in the second quarter due to the higher interest payments prior to the April refinancing.
But expect to generate positive free cash flow thereafter.
We're pleased with our first quarter results, particularly as they reflect gogo <unk> ability to drive growth even through the lingering effects of COVID-19.
Before I move to a discussion of our guidance and long term targets I will touch on our balance sheet position, which now reflects the comprehensive refinancing we completed last week.
This represents a major milestone in our transformation to the new Gogo.
And creates a step change in our value creation potential.
I'll summarize the mechanics of the transactions and then elaborate on some of these benefits.
As we previously announced.
In March and April Gogo entered privately negotiated exchange agreements with <unk> and other existing holders of our 2022 convertible notes.
Through those exchange agreements approximately $135 million of aggregate principal amount of the convertible notes were exchanged for approximately 24 million shares of Gogo common stock.
In connection with the GPC, Our exchange agreement Gogo Welcome Mark Anderson, managing director at GTC, our to our board of directors.
<unk> has been a strong support of our strategy and we truly look forward to continuing to work closely with Mark and the <unk> team as we execute our shared vision for driving shareholder value.
As Oak described we completed our comprehensive.
Refinancing transaction on April 30th.
We secured a seven year $725 million term loan b bearing interest at LIBOR, plus 375% with a LIBOR floor of 75 basis points.
In addition, we put in place a five year $100 million revolving credit facility.
We used the proceeds of the term loan b and cash on hand to.
To redeem in full the $975 million aggregate principal outstanding of our 2020 for senior secured notes.
It returns.
And thirdly are fortified balance sheet makes us even more resilient against the potential increase in competition.
And as a result, we are well positioned to further delever, our balance sheet to enhance shareholder value returns overtime.
Over the long term are strengthened free cash flow profile is augmented by low ongoing capex.
Significant tax assets of about $800 million in net operating loss carryforward.
And our plan to settle the conversion of the remaining converts income in stock hour prior to their maturity.
We currently have approximately 109 6 million common shares outstanding and approximately $103 million in aggregate principal amount a convertible notes outstanding.
As of made for US, we had $100 million of cash on hand.
With our Undrawn revolver and no current plans drawn it we exit the refinancing with $200 million in total available liquidity.
Our team has reason to be very proud of what we've accomplished over the past year to completing the CA divestiture and in the month since through this additional transformational transaction.
Today, we are the new gogo well positioned to build on our enhanced financial profile and strong market position to drive long term shareholder value and deliver on a clear actionable investment thesis.
Now I will turn to be updated guidance, we announced this morning, starting with 2021.
Based on the strength of our first quarter performance, we're raising our 2021 revenue and adjusted EBITDA outlook.
We now expect 2021 total revenue in the range of $310 million to $325 million.
Increase from the previous range of $300 million to $320 million.
We continue to expect service revenue to grow at least 15% over 2020.
However, we now expect equivalent revenue to grow at least 20% in 2021 compared to our previous expectation of equipment revenue being relatively flat year over year.
Before we open up the call to questions I'll, just reiterate our thanks to the World class Gogo team.
Our progress and strong momentum are a testament to our team's dedication ingenuity and unwavering focus on delivering for our customers and reaching our strategic goals.
<unk> team.
Operator, we're now ready for our first question.
As a reminder to ask a question you will need to press star one on your telephone again that is star one to withdraw your question press the pound or Husky. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Rick Prentiss from Raymond James Your line is open.
Thanks, Good morning, everyone.
Good morning, you guys have been busy.
[laughter] try assets.
[laughter].
We'll start the conversation on competition, Oh, he mentioned a little bit about our bonds.
Consistent you in case, you make a decision on Leo but you get a lot of questions about competitive dynamics, obviously theres other air to ground potential networks out there, there's leos bioscience talks a little bit about what they're doing in business aviation, but talk a little bit about how you see the competitive dynamics and your ability to continue to grow share.
Yeah, well, we look at.
Growing units not necessarily share anyhow.
So.
We don't focus so much on share buyback.
Yeah, we look at day three three <unk>.
Dental segments of competitors are complements depending on how you want to look at them.
We actually view it as more of an opportunity than a threat.
There are three.
Networks that are.
In process right now and probably more to come after that obviously have starlink.
Tell us that you have one web.
And at least tell us that in one lab have telegraphed pretty clearly that they're going to move in a <unk> manner.
Our segment and I think.
We view that as an opportunity to get partnering with either of them in order to add Leo is a feature of our offering and frankly, we think that's a pretty big threat to our competitors.
This is our electronically terrible internal.
And.
We are.
We are obviously looking at doing that and thinking through that and how you actually put that on a <unk> aircraft.
And do that.
It's essentially all we would need to develop to be able to access a Leo network and.
As I said earlier, both tell us that among that looked like I'll enter this business to business relationships. So we.
We hope you'll be able to.
We have not approved this plan, we're not there yet, but we're looking at it hard and and.
If we execute on it but he would give us the ability to certainly defend our core market.
And expand overseas, which is.
Where we don't really have much business today.
Cause that's Leo G.
G O fronts.
The big weaknesses is latency and.
I think over time is Leo come along with much lower latency.
The weaknesses of.
For high high latency solutions idea will become more apparent to end users.
When we were in the commercial airline business, we did a lot of work.
With.
And the airline in particular understanding the impact of latency and we're looking at.
For future applications that people would be using an aircraft.
And setting parameters around customer satisfaction in about half of.
Their use cases, we came up with could not be served with G. O satellite connectivity. So both our competitors in the satellite world. The Geo competitors have long term committed plans to launch more G O satellites.
Is it can be very hard for them to pivot.
Leo satellites anytime soon so we actually view that as a weakness.
Those guys, obviously, the <unk> are much more expensive to install than we are.
As a major inhibitor and frankly, just given them.
Relative simplicity of our equipment compared to theirs that will always be the day are far more expensive than we are there.
Their service plans tend to be a lot more expensive viasat has been discounting to some extent and trying to come down to what they call atg prices. However, revenue really look at their plans there are a lot of invitations [laughter] that.
Kind of I would say undercut, what they're actually saying publicly.
So.
They're stocksdale on the wall the end of the market does the equipment.
Heavy and it's large.
<unk> is a little smaller than inmarsat, so they've been able to come into the super mid sized jets.
But that's about it and so and we compete very effectively with those guys.
Hi, and we actually have more jet from a large market and and the Super mid size market then both inmarsat Viasat combined often and frankly, we are install on the same aircraft. They are in the customers use us over North America use the satellite product in there and other regions.
And then on smart Sky Duck.
Duck tape.
They've got.
A lot of challenges I think.
I.
They've been around for a long time.
They were gonna put us out of business any moment since 2014, and so far I haven't gotten a network running now I'm not saying they won't get a network running and they obviously they are working hard at that.
But there are a lot of revelations that came out of smart sky in the last quarter that.
With cast out on their ability to launch a network anytime too soon they haven't achieved least according to an article two weeks ago.
Not yet achieved a tower to tower handoff, and that's a pretty necessary condition for us cellular type system like an atg system.
The issues are not only technological though I mean, you've got a bill the distribution network like we have you got it built up a sales organization and build relationships.
No you've got to.
Get a solid dealer network and then you've got Incent those dealers.
To invest in developing FTC's to install your equipment in hundreds of models of aircraft.
And dealers aren't going to really go out there and invest in that unless they're pretty sure they're gonna be able to sell those stc's to other dealers because there's going to be a lot of demand for the product.
And I think that with our <unk> product coming out dealers are going to look at that kind of skeptically.
And I was going to say Gee.
Looks like Gogo is probably going to have a better product anyhow, so why would I invest in creating those stc's.
Then you Gotta turn on a light up a whole network. So you're gonna have high operating costs and all the backhaul, they're going to have more power density than we have and that means they're expensive, they're backhaul is going to be more expensive than ours.
So you're going to have you know you're gonna be burning a hole in your pocket, while you're trying to build revenue gradually over time. This is not a market that moves.
Lightning speed takes.
It takes a long time to to to get airplanes into shops and stalls and it takes a long time for Oems to make your mindset et cetera. So.
Just think it's a top hall.
And.
They.
They've gotten some funding recently, but it's gonna take a lot more funding for them to to be able to come a real competitor or belief.
The security that answer your question for you right.
It does very thoughtful answer I appreciate that obviously you guys spent a lot of time moving as a component environment.
Uhm follow up question is you've mentioned strategic projects strategic possibilities in the future then expand overseas is that what we should take a is where some of the future might be food Gogo and so would you say some of those same issues those for how to use them to develop a dealer network and sales 'n' and opportunities overseas.
I'm hearing you rented that might be an opportunity strategically.
Yeah, well, we actually already have sales and support overseas because of our old narrow band products.
We sell radian, and we sell Swift broadband globally. So.
We have we have in network already we would.
Need to expand that somewhat but that's an incremental investment we could make.
Without too much cost we also.
The way, we would probably go at this that'd be best back up for one second.
We have not committed yada board does not formally approved yet.
Going after in USA Leo project or some other options, we see on the table, but the slight we've been making as it advanced gives us.
The opportunity to go after those.
The option I should say of going after those opportunities if we want to.
That's.
Really powerful I think that as we look overseas.
You're going to start obviously with large jets within the essay Leo kind of apparatus, but once you're there.
You know you can go after the medium sized jets.
And light jets, because the Esa form factor should be smaller and give you the ability to go after those guys were particularly good engineering for small aircraft. That's one of our very core competencies and so.
We think there's the opportunity with leos to go down market overseas in that market, a 14000 aircraft, which which you really can't do with a G O satellite solution. So.
That would be the attack.
It makes sense from I said grocery and that's what was really getting at is the amount of places that don't have connectivity.
Yeah.
You overseas is pretty simple. This this is just not economic.
Really most region to build and Atg network.
Because.
Outside the U S as a large geographical area.
And.
It's 20% to 30% of the world's flight as the rest are in the U S. So there is very low flight density.
So.
The capex involved in creating Atg network is pretty insurmountable you do have an APG network in Europe of course.
Where there is some density but all of Europe in total is still only six and a half the standard of all the business aircraft in the world So not a very big market.
Great.
Yeah. So.
Satellite is really going to have to be the solution to the rest for.
Great. Thanks, guys stay well.
Thank you.
For your next question comes from the line of pill.
From J P. Morgan your line is open.
Hey, Phil Hi.
Hi, guys. Thank you.
I heard the milestones in five G. That's great what hurdles remain in getting that that up and running.
Probably need this current.
Five G chip production to stay on track.
And assuming that happens then all the technology risk is is removed and it's really a function of blocking and tackling.
And.
We are on integration testing and I like it but basically everything else is in our control, let me put it that way.
So we have a great program management organization Gogo and.
And they've done an excellent job of managing this risk and.
And.
And.
Organizing the project in order to still hit our deadlines and we feel very good about that so we're on track for 2022 as we said.
No and when it comes to blocking and tackling we are really good at it.
Would be.
Force Atg network really we built the first Atg network.
Then rebuilding TG for.
And you have to remember that we were on the verge of launching are for.
First significant upgrade.
Of our Atg system.
But unfortunately, we had a Chinese partner on.
Back in 2018, when I joined the company and that looks almost for complete.
And that was working very well [laughter].
We.
So we did that and now we've got this so our team is really good at this I understand how to do it and we're very confident in our ability to deliver.
Okay.
Okay.
And you talked about 28% penetration and we got into this a little bit with the recommended to go but but or do you think that the D. L. Three price points are enough to cover the sort of.
The gamut of planes out there.
How high can penetration.
Get from 28% given the price points you have today.
No I think.
It's hard to imagine for me 10 years from now that there's a fine without connectivity.
So.
That's how we look at it there are markets like in general aviation, which is not an accountant not in that 28% share total addressable market.
But there are markets like general aviation and.
The general turboprop market.
When you look at them.
You say, okay, I understand that that.
He was certain turboprops that or not.
Charters that aren't that profitable or whatever not addressable today, but I think that ultimately they are addressable so.
We believe all planes will be connected.
In 10 years time, and yes, there may be lower price point for to get you there, but all three is pretty cheap.
It's around $30000 as an entry point.
You can buy pay as you go plan.
That if you don't fly that much you don't pay anything.
Can buy pretty low cost, but we call core plans and then you can upgrade over time, you can upgrade the equipment, Italy easily for three stages of about three chords and then there's two more enhanced stages after that so.
You can you can come in pretty cheap and grow and we're getting a lot. We're getting some success in the light under the market question and and the turboprop market.
So we think we're we've.
We've got some good openings, there and yes, we'll keep learning and figuring out better ways to.
More of those markets, but so far we're making some pretty good progress.
Okay and last one any anything you can give us on the status of conversations for the remaining convert holders. Thanks.
That's really a very question, but I'll answer it because it's a really easy question financially [laughter].
We're not talking to them right now.
There is not that much incentive for us at this point to convert them book.
Convert them at maturity.
Or if there's that they can make a compelling economic case to us for it to convert and we will.
Yes, that's right.
<unk>. The reason we did a previously was we wanted to get them converted because it really enhanced the same as we did as a help to assist in getting an upgrade for example, but as I've mentioned that incentives.
And are there certain whether it was before.
Okay. Thanks for.
Your next question comes from the line discuss through from Rod Capital. Your line is open.
Thanks for taking my questions.
Hey, Okay very congratulations on all the work you've done over the past year. It's it's nice for you guys, becoming a real company.
Okay. So.
So very just just real quickly I'm not sure I missed the number but did you give a number for intelsat contribution in the first quarter and I just wanted to clarify on the component availability. It sounds like you guys have sufficient inventory to carry just through the sheer just want to confirm on that front and then as it relates to.
Fighting the fire you upgrade I'm wondering what the cost is oak in terms of.
Moving the advanced existing advance installed base in upgrading that two of <unk> solution and as you look at now it sounds like there is an uptick in terms of.
New jet orders I think you said, 6%. This year next year, what do you think the attach right for that is in terms of connectivity and particularly on the turboprop market, which has been in Underpenetrated area. I mean, how deeply penetrated do you think that could be over the next three to five years.
Let me square on your current.
Let me take care of first of all around it's Joseph Scott, which is a straightforward or so it was about one for $2 million for the first quarter and because you know the under the minimum amount star relatively modestly and then growth from there and if this is a tough going to have some impact on.
Service murders. It makes it a couple of points difference in service margin because of that geographic shift on the financial statements from day.
Customer service to revenue.
Okay, let you take the other question.
Yeah.
The analyst projection is.
Ah well known investment bankers got somebody on this call and it has a very good [laughter] could business aviation analyst.
And they have raised their projections for 6% deliveries this year at 6% next year.
So that a lot of those units will be installed with IFC it might not always be gogo some of those would be larger jets that might.
Only have the satellite solution in them. So I don't I can't give you an exact number on what we think we would get out of those six per cent today, but we can get that deeper into their numbers and give you. Some projections if you'd like terrible, perhaps you know a lot of October perhaps coming out today do come with IFC.
There's not a lot of new turboprop deliveries.
But.
Most of them would have.
Some IFC and.
Gotcha, what was the other.
Sorry component component availability in terms of your comfort level.
Yeah, we have pretty good line of sight.
Through the next couple of quarters.
Able to fulfill our demand and we're still working on securing making sure. We have supplied secured after that.
The benefit of being.
One of our of our.
Sourcing strategy in our common componentry as that.
A we don't have to secure that many different FK use which is good it makes it a lot simpler indeed for each afk you we order a lot more of them. So we have a more of a more important to our suppliers. So that gives us a fair amount of leverage in terms of trying to get to the front of the list when it comes to getting supply so our team's working extremely actively and.
They have.
Very good tracking and all of this kind of stuff so.
We don't take all of that in inventory is that would build up our inventory.
Ah.
Working capital needs a lot, but we secured any secure and where.
As far as how far out for a good for a good out a couple of quarters and are trying to finish it up through the end of the year. So.
I'm pretty good about it.
And lastly, if I could oak.
You answered a lot on the competitive landscape, but sports guys certainly made.
A lot of headlines talking about the.
Intellectual property position I'm wondering if you could just quickly address are there any concerns that you have related to your IFC solution in its ability to operate in a <unk> environment handoffs or otherwise that has any concern for you as it relates to the patent position.
Yeah, we're not.
We're not concerned I mean at least study every one of their patents and a lot of detail make sure we understand them and.
And we don't believe that they have any valid patent that we could be founded infringing upon now they they.
They do have patents that we don't think are valid because they have ignored prior art.
But that's a different that's a different issue. So we have more patents and they do if you want you know who's got the biggest patent list. We do we have 349.
They.
We've been in this business is a very very long time and thinking about a lot of different ways to do atg for a very very long time, and there's nothing there doing that we haven't really thought about I'll put it that way.
And the thing that.
Dark Sky did that was smart early on and we did it also is figure out how to access unlicensed spectrum and they had this.
It's a regulatory loophole I'll call it that.
How's us to use regular enlighten spectrum and we can do the same thing.
Can't patent regulatory loopholes.
[laughter] that's about the most original thing they've done so.
And back to the patent from we're not concerned they may find that the only way.
That they can.
Convince investors that they have something that's monetize a bowl assist you us over intellectual property, but I think that would be a mistake on their part.
Great. Thanks, so much congrats on the quarter.
Thank you.
If it is good.
Your next question comes from the line assignments flattery from Morgan Stanley. Your line is open.
Thank you very much thanks for all the guidance on on October you've talked about the number of claims growing 400, a year from there.
The opportunity for you to get into some of the smaller planes. So we were talking about so how how does that influence for your thinking on what happens to offer you go up to the date of growth.
You.
Continuing you've got some of these new unlimited times, but order all but put some takes on that over time and then thanks for the free cash flow guidance. How do you think about what you will spend that hundred million plus over the next few years balancing between paying down more debt.
Strategic investments M&A return of capital what are the priorities as you get into twenty-three and beyond.
Yeah, some of them happy to take the those are.
<unk> you asked about the puts and takes there are several drivers there.
Couple that will push that up overtime and one that maybe visit overtime.
So first people tend to move toward.
That'd plans. So we have seen that progression over time, they want to have predictability in their bills. So they wouldn't have access to the full services. So so that's one thing that tends to lift or just a second with overtime is clearly five G. Because of the enhanced performance of strategy. We're very confident will be able to to price that is higher levels were.
Flipping that value, so that would lift or for overtime is zone.
Five <unk> network is deployed on the downside as we get into.
Smaller aircraft they tend to spend less as you would expect on a monthly basis.
But having said that the.
Price per megabyte is still attractive and is a very underpenetrated market. So so that.
It is it related attracted market for us. So it makes sense to continue to go after that market, but we do expect.
<unk> to raise overtime, particularly as you look at it.
The deployment of for a G.
On the <unk>.
Uses of cash $100 million, a free cash flow are for.
First priority is to continue to delever. So.
Made a major step forward on that with the sales.
And using that.
Those proceeds to pay down debt.
I still want to continue to be leather.
And then out over time, we will have to evaluate that when we get through the the full deployment of <unk>.
As we are generating cash will will speak with those priorities are but given puts us in a.
In a great position to be able to even frankly think about those decisions at this point and what is that and stay target leverage to think alright.
Yeah, we haven't early set that will.
Whoa.
We will look at that as we.
As we've continued in for the business and as I said.
Their side of the five day deployment.
But it will book.
Taken care for look at how to balance leverage against shareholder returns and.
And come out with something probably more specific as that unfolds over time, but right now we haven't set that there is no decision to make at the moment.
Alright, thank you for that.
We don't see a need that lock ourselves into something when we don't know what condition.
Conditions will be 18 months from now, let's wait and see in terms of the investments.
The opportunities that we.
That would have on the drawing board are much lower investments then <unk>. So I don't want people to think that we're looking at those kinds of heavy lift for again.
And our requirements for those that they give us.
Significant competitive advantages and they have a very high return on invested capital so.
If we're going to be pretty high bar on investments.
Thank you and for them and I would just add one piece of art for your question to has talked about revenue growth annually at least 10% and split between different plants coming on line round numbers about 8% of planes come in line additional aircraft on line in about three per cent of our per growth overtime. So that's basically the mix.
Historically, those two things obviously has been the drivers or improved revenue over time also.
And it's not fair day, then you're on the our per where does that more of Safari free kicks 'em.
Yes, it does step up one side G kicks in because that is.
Oh really a step function in the increase in order to.
But if you look at it on a contract basis done this for three per cent.
Okay.
And Simon just to make it really clear, yes, we will have.
More customers with lower our our our food than the average and we're going to have more people above.
But it's all going to drive growth for us and is very put points out on a meg per megabyte basis is going to be very profitable. So that's.
That's why that day.
Overall are are blue number only goes up at 3%, but.
You've got growth at both ends of the curve so.
Sure.
Great.
Thanks.
Thank you.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad.
Again that is star one your next question comes from the line of Louie Depalma from William Blair. Your line is open.
Great.
Well can you hear me.
Yes.
And we have items.
Great.
Great I just have one quick line.
Alrighty 837, but in terms of your future free.
Growth.
How much of your growth is expected to come from retrofits.
First is line fifth annual related to this.
Over the past year do you have an estimate for how many of your Atg's system shipments were to the OEM channel versus the actor market either channel.
Generally speaking it's about 60%.
Aftermarket 40 per cent OEM.
Value habit for the most recent.
Quarter and year.
It's been heavily for.
After market recently, yeah. So if you look at at.
Historically and kind of a go forward basis Marie.
Mmm as a percentage of atg equivalent revenue.
And the fourth quarter was because it looks at Skidmore is for 2025 per cent range for OEM.
And the first quarter. It was about 40 per cent OEM and as we look at it on a go forward basis.
The ODM percentage.
Expect to be in that kind of.
30 to 40 per cent range.
Awesome sounds good that's it for me Thanks day.
Okay.
Goodbye.
And there are no for your questions over the phone line at this time for centers you may continue.
Well okay.
This will conclude our call for today. Thank you everyone for your participation from.
Bye.
Thanks.
Particular, who is today's conference call. Thank you for participating you may now disconnect and have a great day.
[music].
[music].
[music].
[music].