Q2 2021 Gogo Inc Earnings Call

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Excuse me. This is the operating today's conference is scheduled to begin momentarily until that time here lines and we can be placed on hold.

Once again today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold and thank you for your patience.

And then.

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Barbara and good morning, everyone. Welcome to go go second quarter 2021 and earnings Conference call.

Joining me today to talk about our results are only 4 chairman and C E O and.

Barry Row, and executive Vice President and 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 financial performance of the company.

We caution you to consider the risk factors that could cause actual results to differ materially from those and the forward looking statements on the conference call. These.

These risk factors are described and our earnings press release filed this morning.

And are more fully detailed under the risk factors and our annual report on form 10-K.

And 10-Q.

And other documents, we have filed with the S E C.

In addition, please note that the date of this conference call is August 5th 2021.

Any forward looking statements. They we make today are based on assumptions as of this state.

We undertake no obligation to update these statements as a result of more information on future events.

During the call will present, both GAAP and non-GAAP financial measures.

We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures and our second corner.

Earnings release.

This is call has been broadcast on the Internet.

And available on the Investor Relations website, and I'm Gonna go go well.

The website and I are died Gogo air Dot com.

The earnings press release is also available on the web site.

After management comments will host the Q&A session with the financial community only.

It is now and my great pleasure to turn the Colorado Quake.

Thanks, well and thank all of you for joining us this morning and for your interest and go though.

I sat and call the results demonstrate strong momentum and we execute on our pure play business aviation connectivity strategy.

Demand for B, a and fight connectivity is accelerating on.

Advanced platform is perfectly positioned to take advantage of that acceleration and I've.

Vertically integrated business model is converting that demand and and sustainable very positive bottom line performance per day, though.

My remarks will focus on first highlights of our second quarter financial results, clearly demand metrics or the business aviation connectivity market.

Second and discussion of drug I was merits relative to potential competitors.

Third and update on progress against our strategic initiatives and.

And fourth I'll discuss our guidance and she has some thoughts and how we think investors should look at our equity.

Okay, well, then dive into the numbers and discuss a raise 2021 guy and give a little preview of 2022 and share our expectations that we will exceed the 5 year revenue and free cash flow guidance and you'd previously provided.

Well, let me start with a brief overview of our quarterly results. We delivered strong revenue of $82.4 million up 16% from pre Covid Q2.2019.

51 per cent from Q2, 2020, and a 12 per cent sequentially from Q1.2021.

When you cheat record service revenue driven by significant increases and both a T. G aircraft online a O L and average revenue per unit ARPA.

On the a O L metric, we crack the 6000 and aircraft barrier for the first time and on the ARPA metric, we hit 3000 and $195 just $5 short of all time high.

What's most excited you asked right now, though is what's happening with the equipment sales and by the popularity of our advance L..5 platform, which is doing a great job meeting the demand of today's connected passenger around streaming file sharing and video conferencing.

Well advanced revenue and shipments are strong for the quarter.

And the answer what else for Q3, and Q4 or even stronger and orders for 2022 are looking like they will be even stronger than 2021, all of which are a lot and we will have long term benefits for gogo.

I'll go on to the end of the drivers behind this demand and just a minute.

But the important takeaway here is that these equipment units will drive high margin very sticky service revenue streams for many years to come.

It's red and sticky because changing out connectivity equipment on a business aircraft is expensive and even worst time consuming and.

As a result.

Have a very low equipment churn rate about half a percent per month, which equates to a 17 year equipment life on an aircraft.

And the reason to believe that advance will continue that tradition of sickness.

They designed it to minimize hardware upgrades and the future and relegated most enhancements to easy over the air software upgrades.

For instance, dad and Leo satellite capability, we'd have to add and and 10 on top of the aircraft, but would not need to touch the interior of the aircraft at all that upgrade would be pure software.

For that reason, we're encouraged that and that is continuing to grow as a proportion of our subscriber base accounting for 33 per cent of our service revenue and Q2.

From 25 per cent and Q2, 2020, and 32 per cent and queue on 2021.

And other positive data point around evangelists are just announced contract with serious aircraft for their visit jet personal jet.

A solid proof that are small events L..3 4 and factor and are lowered 3000 foot service floor, which was achieved with just a software upgrade is appealing to owners of smaller aircraft.

Yeah, and if there's a really exciting new partnership for us and it's our first entry into the 200000 aircraft General aviation market and I'll just.

Got it a little more further and the call.

On the bottom line Gogo delivered adjusted EBITDA, $36 and $7 million and increase of 56% from pre Covid Q2.2019.

Increase of 70% from Q2, 2020, and 8% from Q1 and 2021.

A second quarter performance reflect the overall strength of our business model on a leading market position and positive interest free time, I'm very proud of the Gogo team and Wanna. Thank them for what we accomplished and the quarter on the right track and our second quarter 4 cans very good things to come.

Now, let me turn to the business aviation industry demand drivers.

The business aviation market has clearly shifted out of recovery mode and has moved into high growth mode.

The flight count on Gogo equipped aircraft for Q2 ran at 13 per cent above the flight count for Q2, 2019 as opposed to and Q1 when it ran 3% below the flight count for Q1.2019.

We had all time highs for flight count several days and the quarter and broke 5000 flights and 1 day for the first time.

More importantly flight activity ran above pre at Prepandemic levels and every segment except corporate.

And by the end of the quarter, even the corporate segment recorded flight counts above 2019 levels.

Interestingly the size of the gap between 20, and 19 and 2021 monthly flight activity improved sequentially for every month of the quarter for every segment of our business and this continued even through the first month of Q3.

While the entire fleet.

Lights and April were up 6% overflights and April of 2019.

Right and May rough 11% of her fights and 2019 flights and June were up 23 per cent overflights, and 2019 and flights and July 26% Overflights and 2019.

Flight count growth within the year has been substantial across all segments as well as the July corporate flight count up 53% from January.

With charter flight accounts up 46% from January and Fractionals up 36% from January.

Given that international travel and it's still difficult some of the larger corporate flight departments are still well below that 2019 flight levels and we expect the corporate segment to grow even more significantly once the global economy fully reopens.

The big question on everybody and the da Industries mind is well this heavy traffic continue.

Recent market data suggest that it will.

July survey of more than 225 private Flyers by the online publication jet card comparisons so that 69% of passengers expect to fly private aircraft more frequently post COVID-19 and they did before COVID-19.

28% expect to fly private aircraft at similar levels and on the 3% expect to fly private aircraft less often than before the pandemic.

For us this increased demand for flights as positive because it drives demand for aircraft and given that the fleet of pre owned aircraft for sale continues to hit all time lows that demand is increasingly turning to purchase of new aircraft, which sales opportunity for gogo.

Some evidence of these trans include.

Golf Street announcing and it spoke to bill ratio hit 2.1, and Q2 up from 1.3, and Q1 and 1.25 for their 10 year average.

Tech strong just announcing that their book to Bill was very close to 2 considerably higher than the 1.6, they announced and Q1.

And net jets announcing that they're pulling forward aircraft acquisition wherever possible delaying aircraft retirement and planning to spend 2 and $5 billion and 100 additional aircraft to arrive by the end of 2022.

New aircraft orders are good for Gogo, because most new jets and now delivered with ISC and given that we are lion's head at all 9 business aviation Oems, we're very well positioned to get our fair share of those orders.

The other big revenue driver for Gogo right now is the rapid increase and the amount of data consumed by passengers as they used more data intensive applications, such as streaming file sharing and video conferencing.

Across our entire fleet customer's concern and 52% more data and Q2.2021, and they did and Q2.2019.

Given by 26% increase and megabytes per flight hour and at 20% and price 20 per cent increase and flight hours per day.

Data consumed across large and charter and fractional flight actually nearly doubled over 2019.

To meet that demand and the second quarter, we launched for streaming plans for advanced customers, including on new limitless streaming plan.

We sold more than 50 of those screaming plan, so far driving and increase of $193 per month per advanced aircraft online.

This is a great example of how we can easily add enhanced products and services on top of our advanced platform and drive incremental revenue.

And it's also worth pointing out how well positioned gogo is to meet this increased demand for data.

First off we have events or hardware and software platform for accessing our network and.

And significantly improves the speed at which data is delivered inside the aircraft compared to our old classic products.

Think of that as us and proving the cell phone hardware and software and accesses your cell network.

Second is that <unk> network itself and 2017, we had 1500 mainline commercial aircraft with more than 100 passengers each accessing our a T. G..4 G network.

The day they are only roughly 200 mainline aircraft left on the network net is freed up a tremendous amount of capacity and dramatically improved performance and.

Day, we're consuming 1 third the number of terabytes of data per day, as we were in 2017, which significantly improves the customer experience.

The convergence of these strong supportive trends and on our ability to meet that demand with the right product. It's tremendous momentum as we continue to focus on driving profitable growth.

Now I want to take a moment to comment on the competitive landscape and our strategy to maintain gogo was leading position.

The competitive threat investors ask us about the most are potential entrants hainley satellite companies launching lower orbit satellite network and smart Sky startup and it's been promising to launch a competitive atg network since 2014.

Let me start with Leos.

As I said before we view them as an opportunity not a threat.

Close the business case on the vast amount of capital they need to invest to launch those constellations. They are focused on finding partners that can boost the fastest path to revenue and and to be a market. We are by far the fastest path to revenue.

And tennis electronically terrible attendance necessary precondition to accessing Leo constellations and with the multi bear capability, we have and the advanced platform, we can easily add and Esa on top of the aircraft and leverage advance for all the workings inside the aircraft and thereby dramatically lowering the invest.

And time required to install the system.

To add Esa will take modest amendments to our current FTC's.

Give a loyal partner access to a vast fleet of aircraft and <unk>.

Loading our entire advanced installed base. It's by the time Lee are are already will be by far the largest ivy ISC installed base and the world.

Also all of the aircraft, which we have advanced FTC's and the aftermarket which is virtually every make and model of aircraft and finally line fit and all 9 Oh, yes, we're advances already lined fit today.

We continue to develop plans around that opportunity and and Q2 tested the idea with some of our most knowledgeable customers. Their reaction was overwhelmingly positive they would love to buy their ATT and satellite connectivity from 1 provider and have it all be part of 1 integrated solution on the aircraft.

For us the yo capability, but give us and attractive product for the heavy debt market and the USA and it will give us access to the 14000 aircraft and the rest of world market that we do not address today.

Yeah. They are competitive threat people raise a smart guy and aging startup that is raised and spent more than $300 million trying to build a competitive ATT network.

Based on our knowledge and ATT economics, we spent a lot of time modeling their financials and <unk>.

It's very hard to justify a business case for the investment needed and complete their network and then fund operating losses. After they light that network up and try to ramp revenue.

And Gogo case, we had a profitable north American commercial aviation business that funded built out of them network and are operating losses, as we ramped RBA revenue.

Smart Guy and has been taking a lot of pot shots at Gogo and their recent fundraising and we believe they have misrepresented our capabilities, especially around data speeds and customer support.

The first on network. We believe we have a superior network to day, and we'll have a vastly superior network. When we launched 5 G b.

Because they will rely on and on licence spectrum, which faces significant interference from ground base usage like Wi Fi Bluetooth et cetera.

Well, we also plan to use on license spectrum for our 5 G network, we will aggregate that spectrum is our 4 megahertz. His license spectrum that we will always have a clean signal.

Degree clear both networks should perform very well, where there is no ground interference. However, we believe ours will perform better where there is interference.

Our network will also be 5 G from and the end, whereas their network will be 4 G. LTE with quote unquote elements of 5 G.

And network will only go as fast as his narrowest bottleneck and the 100 per cent 5 G pipe, we should be able to transmit more data and more efficiently than 4 G. LTE pipe with 5 G elements.

We're also constantly enhancing on network and I've made enhancements, we believe they do not offer such as lowering our coverage, Florida 3000 feet.

The coverage map on their website starts at 10000 feet.

We also believe they've made some miscalculations and developing their equipment.

The mainline product will require both of roughly 30 inch and a roughly 15 inch and turner be attached to the bottom on the aircraft.

And as for L..5 and 5 G. We require to 13 inch and tenants 45 inches versus our 2006 inches per.

Craft real estate is very important and the business aviation market and we think they face and significant challenges there.

Finally, they have been critical of our customer service that surprises us Gogo has been ranked number 1 and the AI and product support flight deck avionics and Kevin and electronics category for 8 out of the last 10 years and was second the other 2 years and.

A survey last year, 93% of Gogo customers respondents agreed with the statement that it's easy to do business with Gogo.

And our transactional NTS, which rates customers feelings about our customer service runs consistently between the mid sixties and mid eighties and those are world class numbers and net promoter scores.

Smart Guy and also what is their patent portfolio as a competitive advantage over gogo.

First off we have a larger patent portfolio and then they do but more importantly, our attorneys and engineers have reviewed all 144 of their United States patents in detail and our attorneys advise us we do not infringe any valid patents smart sky items, it's worth noting that most of their patents applied older technologies and non even mention.

And 5 G. And fact is smart Sky did try to service patent against Gogo, many would likely be invalid, because they encompass systems Gogo is used in many cases for years if not decades.

So to conclude on competition I think we are confident but not complacent.

We can remain the leader and the <unk>.

Business for years to come.

And you have a solid business now that generates free cash flow and enables us to continue on and innovating to create value for customers and shareholders.

Now, let's talk briefly about our progress on the strategic initiatives are discussed on on our last call remember we have a 3 pronged strategy.

First and investors improve and improving the performance of on APG network to keep pace with customers on ground expectations and drive penetration of our advanced platform.

The key initiative under this problem right now is to deploy our 5 G network and the second half of 2022.

The second prong, it's a liar liar and new products and services on top of those and to add incremental revenue improved performance deepen our competitive mode and add to our total addressable market and.

And the third is to adhere to our advanced platform hardware strategy to drive get out drive down costs and quality up.

The primary initiative here is use of common components across all of our products, including all 3 or 5 or 5 G.

As illustration today, roughly 80% of the components no 3 products of the same which means we can drive higher volume purchasing get lower prices and manage quality more efficiently and if we use different components and each products and.

And this may sound boring, but it drives tremendous value for customers and for Gogo I will note that the value of this last song of our strategy has been especially useful. This year is having more meaningful supplier relationships has enabled us to respond to a 30 per cent increase and unit demand and raise revenue guide and significantly despite the global supply shortage.

Now let me report on the progress against the 3 pronged starting to Gogo 5 G.

There are 4 major components to our 5 G product and we've made significant progress and each start.

Starting with the aircraft and Turner that is completed flight testing and is headed for qualification testing and Q4.

And that's the 5 G base station and tenants and the quarter, we hung and tested and our first foray and will now head into queue for for installation of our 7 tower Testbed net.

Next to 5 G Corps, which is the data center and now the backhaul net is complete and ready to go and nothing left to do there except for integration testing.

And and finally, the 5 G airborne and he'll argue with a small box that sits next to advance on the plane and houses are aircard.

We have completed the prototype of this how are you and have tested and it started prequel testing.

However, as we discussed and our last 2 calls we've had a delay and delivery of the 5 G semiconductor chip that goes inside this box.

All the technology on that chip that supports Gogo has completed testing and is ready to go and.

The chip itself was delayed to accommodate addition of new functionality for another customer.

New functionality has now passed design and yield testing so it should be on track for us to deliver commercial launch with Gogo 5 G and second half of 2022 as promised.

Now, let me touch on Howard layering, new products and services on top of our flexible advanced cloud.

Platform from 2 of our strategy.

There are a couple of good examples of that and play right now the first is 5 G itself.

Hardware portion of the L..5 to 5 G upgrade is designed to be easy and inexpensive.

Replace the 2 L 5 and tenants with 2.5 and 10 on that fit and the exact same attachment points as they are 5 and 10 and we'll add a small box next to the advanced box inside the aircraft ill isn't that the entire upgraded software just like a tesla.

The second example of lag additional customer benefits on advanced platform is a service contract.

1 of our goals is to leverage and the answer to grow our total addressable market using advanced common componentry, we've developed a small L..3 form factor and with a software upgrade we were able to lower our service slower to 3000 feet from 10000 feet.

Both of which appealed to serious for their <unk> plus vision jet personal jet.

Sure. It's will offer al 3 lines said on the vision jet and vision that is an entirely new market for us. The 200000 aircraft General aviation market and this is a great example of the growth afforded to us by the flexibility of the advanced platform.

The third example of layering on top of advances the limit was screaming plan and the other 3 screaming plans. We added we introduced in April.

We were able to spot market trend and was simple software upgrade with a simple software upgrade capitalize on that by quickly rolling out for new service plans that gained rapid market traction.

And as I noted earlier have already made a big impact on our advance RFP.

And some it up the flexibility of events combined with our strong installed base and deep distribution relationships gives gogo the ability to react quickly to market and technology changes and drive value for customers and shareholders.

Now, let me finish with a few words on our financial guidance and a long term targets.

Based on the strength of our first half performance and strong momentum going into 2022, they're raising a full year 2021 revenue just revenue adjusted EBITDA and free cash flow guidance.

We also believe that the strong alcohol growth driven by our current events sales both extremely well for future service revenue growth and.

And hence believe we would've grow a revenue at the upper and a a 10% to 15% range and 2022.

We also think Gogo stock is under appreciated it come valuations we.

We have a large on penetrated market poised for growth.

If deep and wide competitive moats.

We have a diversified and high quality customer base, we have high switching cost and low churn.

We have high equipment retention rates, we have positive industry tailwinds.

We have a strong EBITDA the cash conversion.

We are cyclically and resilient as demonstrated and Covid and we make money on new customer acquisition, rather than having to come out of pocket to add new customers.

And you see companies that have similar characteristics trading and double our current adjusted EBITDA multiple which adds to our conviction that gogo represents a good opportunity for investors with.

With the strong support of our team lenders and partners were excited to continue executing and our strategy and leveraged our vertically integrated model and strong balance sheet and drive continued growth and value creation.

And focus remains on continuing on momentum capitalizing opportunities as the business aviation market accelerates.

And delivering for our customers and shareholders Gogo futures bright and with that I will turn it over to Barry.

[noise] and Coke and good morning, everyone.

The dramatic recovery and the business aviation market, coupled with accelerating and demand for connectivity enabled us to deliver record results for this quarter.

The fundamentals underlying these results provide a solid foundation for driving future performance and at least 3 ways.

First is more aircraft come on line. This translates into recruit service revenue that comprises approximately 90% of our gross profit and represents the source of our exceptionally high lifetime customer value.

Secondly, the increasing demands of today's connected passengers are driving continued arthur growth as customers more fully leverage the capabilities of our future proof of advanced platform.

And thirdly, the strong demand has resulted and record backlog levels, which further derisks our projections.

And the second quarter, we set new records for both service revenue and adjusted EBITDA.

The tremendous year over year growth. We experienced this tour is certainly skewed by the comparisons to the depths of the pandemic and the second quarter of 2020, but even on a normalized basis and.

Growth rates are very meaningful.

As I walk through our second quarter from Magic Deforms and more detail I'll note as we did and our press release. This morning and compares to the to the second quarter of 2019, which would provide more normal has comparisons.

At the end and my remark and will also provide an update on an ongoing <unk> investment as well as some additional context for longterm outlook and guidance.

Gogo generate a total revenue of $82.4 million from the second quarter, and an increase of 51% compared to the second quarter of 2020.

Total revenue was up 16% from the free Covid second quarter of 2019 and revenue continues to Ram coming out of Covid.

Total revenues at 12% sequentially from the first quarter of 2021, and driven by increases and both service and equipment revenue as demand continues to exceed our expectations.

Google and choose record service revenue of 64, and $8 million with 47% year over year growth from the second quarter of 2020.

A 2% growth from the second quarter of 2019, and 9% sequential growth from first quarters record service and Avenue.

This growth was driven by an increase in both AVG aircraft on line, which referred to as a O L and average monthly connectivity service revenue per acre G aircraft on line or are approved.

Recruiting subscription based service revenues and important long term values driver for Gogo.

Service revenues growing by at least 13% per year every year since 2010, except for the Covid year 2020.

And even there and covered our service revenue for the full year 2020 is Dan and just 4% compared to 2019 and testimony to the robustness of our subscription based model.

To further impact the drivers of service revenue second quarter, and Atg aircraft online with 6036 up nearly 12% year over year and up over 2% sequentially.

This was the result of new customer activation and continuing reactivations by existing customers as flight activity continues to grow to well above the free COVID-19 levels and those described in detail.

We also achieved record or approve of $3296, representing 28% year over year growth and approximately 7% sequential growth.

Our second quarter on <unk> reflects the benefit of recognizing $1.8 million and deferred revenue related to a customer contract, which we don't expect and future quarters.

However, even excluding the impact of this deferred revenue increased 4% sequentially to $3195 and it was very close to her and hold times higher <unk> explained.

Demand for data continues to grow as passengers increasingly view their aircraft as an extension of their living rooms and offices.

We also recognize $1.5 million and service revenue from and networks sharing agreement was until Saturday and the second quarter.

And we've previously described service revenue from the <unk> agreement ramps over time, particularly after Gogo 5 G is deployed how're.

However, even with this expected ran the revenue derived from this relationship represents represents less than 5% of Google's annual revenue.

Looking ahead, and we expect continued sequential growth revenue growth throughout the second half of the year.

Are upwardly revised revenue guidance reflects our expectations that service revenue for the full year 2021 will grow approximately 20 per cent over the full year 2020.

Turning now to equivalent revenue as open mentioned Gogo delivered and outstanding equivalent revenue of $17 and $6 million and increase of 66% year over year, and 21% sequentially due to increased demand for events L..5 and they'll 3 units.

We've been saying for some time that expanding penetration of the events platform and the both our installed base and with new customers and the centerpiece of our long term strategy.

And the second quarter, we continued to advance that strategy and expand the advanced real estate is all go those new equipment sales where events 053 systems.

Total advancing it's on line for the second quarter of 2021 and grew 51% year over year to 2067.

Events units comprise more than 34% of total APG aircraft on line as of June 30th 2021, and up from 25% as of June 30th 2020.

Ah rent free product provides and attractive lower cost entry point.

Events 5 product has the additional advantage of enabling and seamless upgrade path to go to a 5 G.

And all 5 shipments are running a approximately 60% of total events system shipments this year.

We expect to seasonality we've experienced over the past several years to continue and 2021 with equivalent revenue backloaded to the second half of the year and strongest and Q4.

We therefore expect continued sequential growth and equivalent revenue through the third and fourth quarters of this year.

In addition, as I've mentioned, we have a robust back-load equipment orders totalling more than are projected shipments from the balance of this year and stretching into 2022.

This significantly derisks, even are upwardly revised guidance for this year and provides great momentum going into 2022.

And of course is equivalent comes online and translates into the recurring service revenue the drugs are long term model.

Our increased revenue guidance reflects a 20% to 30% increase and equivalent revenue for the full year of 2021 and as compared to the full year 2020.

This is based on the underlying strength of the market as well as the seasonal dynamics of our business.

Where and implementing a series of operational measures to meet this higher than expected demand.

Importantly, we've managed to our supply chain to position us to deliver on the higher equivalent forecasts reflected in our updated 2021 guidance.

Over the past several quarters, where where to expand our manufacturing capacity and supply chain constraints brought on by the pandemic.

This includes deploying our strength and balance sheet to support our suppliers by committing to larger quantities and materials and and selected cases prepaying to get ahead of new orders.

We're also here marketing approximately $10 million in cash for additional inventory purchases during 2022 to ensure we meet demand and to reduce our code and lead times.

Strategically we have designer platform, a significant amount of common componentry across the group's product offerings, which simplifies our supply chain challenges as those described.

We will continue to pursue creative ways to work with our suppliers and enhance our capacity to capitalize on the strong demand bring.

Reward equipment online sooner and.

And start the value driving cycle of a recurring revenue model more quickly.

Let's now turn to a discussion of profitability for the quarter.

Gogo delivered service margins of 77% and the second quarter and an increase of 100 basis points sequentially.

The increase was driven by a record service revenue, which as I mentioned also included the deferred revenues that we don't expect and future.

As I said previously we anticipate service marriages to decrease somewhere throughout 2021.

Mainly due to increased data center and network operations cause some of which are related to 5 G.

On the equipment side margins increased 400 basis points year over year to 38% and the second quarter, but declined from 43% and the first quarter of 2021.

The sequential decrease and equipment margin is primarily due to the mix and the military versus and also have shipments and a quarter.

We continue to expect equipment margins for the full year 2021 to be or both of 2020 levels. However, we expect the percentage and the second half to be lower than and the first half of this year largely due to mix.

It's important to note that while equipment margins are lower on the less expensive dental free product service margins are quite similar across the 2 product offerings, which of course is most important for overall business model.

Our <unk> product is also delivering on its strategic objective of penetrating the market for smaller aircrews as demonstrated by a recent service announcements.

In terms of operating expenses Gogo second quarter, combined engineering design and development sales and marketing and G&A expenses of $23.1 million increased 35% year over year.

This increase was driven by 2 factors.

First was an increase in sales and marketing expenses this quarter, which were significantly reduced during the COVID-19 period a year ago.

Second was a reversal of our bonus accrual that occurred and the year ago quarter. When we were not certain we would pay a bonus is the pandemic to cold.

You will recall that our plan to forgo the service is 1 of the 16 cost reduction members, we activate a dream COVID-19.

Looking ahead, and we know expect G&A to decrease in 2021 relative to 2020 versus our previous expectation of G&A or many approximately flat year over year.

We remain on track to deliver our target is 10 million dollar reduction and G&A, excluding non-cash stock based compensation from the 2020 level by the end of 2022.

In fact, we are currently running ahead of schedule and despite from transition costs related to the Eutelsat transactions.

Now shifting to an overview of our Gogo Baiji program, we expect spending to ramp during the balance of this year and anticipation of our 2022 launch.

We spent $1.5 million and total 5 G development and deployment comes from the second quarter and the majority of which was and Opex.

We expect to spend $17 million and the second half of the year split approximately 50.50 between Opex and cabinets.

We shifted about $5 million and 5 G spend of 2022, which results and a 2 million dollar reduction and Opex and a 3 million dollar reduction capex for this year.

This shift is reflected and are updated adjusted EBITDA capex and free cash flow guidance for this year.

While the timing of the Gogo 5 G program investments has shifted modestly are expected deployment schedule and remains unchanged.

On track for our Gogo 5 G deployment and the second half of 2022 based on the significant program milestones, we have achieved with junk outlined.

We continue to anticipate about $100 million and overall Gogo <unk> spend from 2019 through 2023 with over 90% of this investment completed by the end of 2022.

With our business now generating strong cash flow, we expect to be and the position to fund the entire amount of the go Loaf energy Capex on it of internally generated cash flow.

In fact, just 1 year of the $70 million and annual interest.

Your savings from a recent refinancing exceeds the anticipated total capex spending for the 5 G program.

After Google <unk> has launched we expect ongoing capital expenditures and the 15 to 20 million dollar range annually supporting and even stronger adjusted EBITDA to free cash flow conversion rate and 2023 and beyond.

This combination of accelerating top line growth and continuing financial discipline translated into very strong bottom line performance and the second quarter.

We are delivered adjusted EBITDA 36, $7 million and the second quarter, a new record.

This represents an increase of 17% from Q2, 2019, 70% year over year increase and and 8% increase sequentially.

Given the resurgence and growth of the market and Gogo was demonstrated ability to translate top line growth to the bottom line. We have increased our adjusted EBITDA guidance for 23 months.

And as we look ahead positive net income is just around the corner.

<unk> is that and exciting inflection point as we expect to achieve.

Painful positive net income beginning and the third quarter of this year.

Free cash flow for the quarter was and outflow is expected of $16 million.

This was in spite of a significant increase and adjusted EBITDA as it reflects our last legacy interest payments on our own financing terms.

For the 6 months and the June 30th 2021 free cash flow was a positive $7.8 million compared to a negative $6 and $3 million and the prior and 6 months prior year 6 month period.

With a refresh balance sheet now and place we expect to generate positive free cash flow for the remainder of the year.

Given our expectations for revenue and adjusted EBITDA and 2021, and we also raised our free cash flow guidance for this year.

It is gratifying to see our how our recent highly successful refinancing enabled by the strength of our business model has created a step change and gogo his ability to January and shareholder value.

Before and say more about guidance and will provide a quick balance sheet update.

Google is and a very strong liquidity position was $109.2 million in cash on hand as of June 30th and we have not drawn on on $100 million revolver.

And as of the end and the second quarter, and we had approximately $828 million and outstanding debt, including the $725 million turmoil and be we recently put in place and approximately $103 million and outstanding convertible notes.

As we've spoken about previously or convertible debt will mature and may of 2022, and we plan to settle and any additional converters with equity, which would further reduce our leverage ratio and streamline our capital structure.

We are well positioned to build on our enhanced financial profile and strong market position to drive long term shareholder value based on on attractive actionable investment thesis.

Gogo strength and free cash flow profile is supported by multiple factors, including a recurring service revenue model attracted attractive adjusted EBITDA margins.

Low ongoing capex, particularly once we deployed Gogo 5 G and 2022.

A material interest expense reduction from a recent refinancing transaction and.

And significant deferred tax assets, which have and after tax value of nearly $300 million at today's tax rates.

Based on the significantly reduced interest expense, resulting from a recent refinancing and the strength of the current and projected business trip and.

We continue to assess whether we need to maintain all or part of the valuation allowance on these deferred tax assets.

It's quite possible that a reversal of our valuation allowance could occur within the next 12 months.

Let me know spend a moment, highlighting our capital allocation considerations and light of our strength and balance sheet and improved financial profile.

We will continue to pursue a balance capital allocation strategy focused on for primary areas.

First enhancing our network through the deployment of Gogo 5 G.

Second further reducing overall leverage.

Third strategically investing and our business and ways to capitalize on market opportunities or further strengthen our competitive position such as the global broadband opportunity Oak described.

And direct over the longer term, considering returning capital to shareholders as appropriate.

With that and I'll provide some additional context on our guidance, which we updated this morning we.

We increased our full year 2021, and financial guidance based on the healthy business aviation market conditions were seeing and are continuing strength to match.

We now expect to deliver full year of 2021 total revenue and the range of $325 million to $335 million compared to our previous guidance of 310% to 325 million.

Adjusted EBITDA of at least $130 million.

This compares to the $105 million to $115 million and adjusted EBITDA guidance, which provided and March Andrew.

And to the 115 to 125 million, we increase this guidance to on our first quarter call.

Capital expenditures and the range of $20 million to $25 million with the majority of tied to go to a 5 G. This.

This compares to our previous guidance of $25 and $30 million.

Free cash flow and the range of $25 million to $35 million compared to our previous guidance of $10 million to $20 million due to increased adjusted EBITDA and reduce capex.

As a reminder, on guidance is for the full year 2021, and our expectation is that revenue will be weighted towards the second half of the year, particularly on the fourth quarter.

Adjusted EBITDA is expected to paper and the second half as a function of our increasing Google 5 G spins and the timing of other expenses.

We've also been more optimistic about our longer term growth and free cash flow targets.

We previously stated that we expected at least 10% compounded annual revenue growth from 2020 to 2025.

Based on the strength of our equipment sales and the resulting impact the service revenue, we see and acceleration and this growth rate.

And now expect total revenue to grow and are ready and the upper and have a range between 10 and 15% for the full year of 2022 versus 2021.

Based on these expectations for increased top line growth, we and now expect free cash flow of more of and $100 million for the full year of 2023. Following the deployment of the Gogo 5 G network and 2022 with significant free cash flow growth thereafter.

We continue to target adjusted EBITDA margin of 35% to 40% throughout the planning period.

We will be updating our long term targets as we refresh our 5 year model and of course for our planning process and the months ahead.

Before we opened up the call to Q&A I want to congratulate the entire gogo team on their fantastic work during the second quarter.

Focus and resolve of our superb team will continue to ensure we capitalize on the tailwind and the market deepened our competitive mode and create value for our customers and shareholders.

That concludes our prepared remarks, operator, we're not ready for our first question.

Thank you at this time and would like to take any questions. You might have finished today and is there a reminder to ask a question and you will need to prance thigh and and number 1 on your telephone keypad.

Began to ask a question please press.

Can they call you the clubs you may cash the town White Husky.

Will cost for a moment to comply with <unk>.

And you have our first question comes from the lineup Scottsdale and lost capital. Your line is open and please go ahead and hey, good morning. Thanks for taking my questions. Congratulations guys on a great quarter difficult operating environment for the rest of the world, but you guys are excelling in terms of what you are are posting.

Hey, maybe quickly to dive in on the guidance this year from and EBITDA perspective.

You've kind of touched on a couple of items, where there was from 1 time sales contributions.

Related to deferred revenue as well as the ramping 5 G costs, but even taking that into account and it seems like $130 million for the second half of this and.

Implying that into the second half of this year. It seems like it's conservative is there something else going on there or.

And you guys really just taking a conservative view of the world and to the second half of this year.

Yes, Scott and as you said, it's at least standard $30 million. So we certainly expect to be above that number.

And the primary drivers. This are really kind of 3 factors to consider when is the majority is due to 5 G that is the majority of the paper and and the second half versus the first time and secondly is that there are some increases and other expenses on your <unk>.

Sales and marketing lineup recur market environment.

These increases more than offset.

The increase and gross margin that we expect to see due due to the higher revenues. So I think we've tried to highlight the primary Susan and then we'd be.

And to be conservative, but again, there's at least $130 million cash.

Gotcha helpful and and if I could as a follow up.

Looking at the broader macro demand picture it seems like it's exceedingly high.

I'm wondering if you could talk a little bit about what you think the overall installation capacity is out there within the marketplace is that going to be a limiting factor are there are some things that you can do on that front because that really seems like it it could be the 1 getting factor out there besides component availability as we started and to 22 and 23 and maybe as well if you could okay I'd love to hear you touch a little bit on early thoughts.

On the general aviation market kind of timing and pricing that you would see going into that and maybe something related to the timing of some of your legal partnerships. Thanks.

Yeah and in terms of capacity, it's a great question.

Scott.

Right now we think that there is there is ample capacity to hit our projections, obviously, but.

We are spending a lot of time access of deep diving on that and trying to figure out okay.

Our market is relatively on penetrated why is that and what are the inhibitors and how can we.

Like those inhibitors down and and accelerate are advancing penetration. So that's actually a work in progress for us.

In terms of deep analysis, I would say that we are growing events very quickly and that were growing at 50% right. So that's on.

On what's already a fairly large number of there's more advanced installations and the world and any other business aviation IFC platform. So.

Other than our old 1, but Ah so we are going and quickly, but we'd like to go faster. So that's your first question.

And the second part of your question and I know the last part was Leo.

Generally.

Yeah, Yeah, So general aviation.

It's a very large market that question is what is the revenue opportunity there for us.

And.

We don't have a firm view on that this is a.

It's kind of a learning experience for us and.

On the.

The day, all we have what's terraces is.

Good for us from a financial perspective.

We are selling you know, we're selling now equipment at at our regular price and they're putting it on their jets and his order.

By their customers and then they have up what I'd culture and.

Macro service plan and they sell the customers.

And that includes a whole bunch of things and now we will incur connectivity as well and then they're paying us for the connectivity. So we're very happy with the with the deal.

The.

The question is on our other parts of the GAA market that that might work.

And we.

We think there may be.

But there are clearly as of 200000 aircraft. There are a lot that are probably not and addressable market for us. So.

And what will give more guidance later as we learn more about this.

But with.

The good news is that has opened it up for us on that.

And there are clearly pockets, where where our products will work and then the last part and we are in and active conversations.

And Leo and Esa worlds and.

I don't think 1 and get over our skis in terms of giving any guidance on timing or anything.

And and take away is that for these guys stayed the revenue is the most important thing they've got to be able to build business cases that show them getting rapidly and the revenue and.

When you look at the VA market and if you understand our advanced platform.

No question that we are the fastest way to revenue. So so I think that will have a good hand to play with the lay on providers and and I will go.

Continue our conversations and and see where it leads us.

Thank you great quarter.

Thanks, Thanks Scott.

Our next question comes from from the line of fans and any time that from colony on line is open and please go ahead and.

Hey, guys. Thanks for taking the questions.

Nice growth.

On the advance units can you can you break out how many of the <unk> you have installed today and and how that compares with 3 months ago.

Very thank you have those numbers handlers and I do.

And.

Yeah. So we.

Climate and some of those so.

The total.

On that we have installed.

And about.

1400 this quarter.

And you are all threes or on the high 6.

600, and some of those get sued over the 2000 and number that we are excited and if that's the growth and we talked about is on over 50 per cent growth over and last year and continues to build quarter to quarter.

And I think the last time, we spoke I think the L..5 number was 1300. So it seems like that continues to improve nicely as well and then I guess oak no. No question that the industry is back and we think it's going to be back for a long time, but you made a comment and your prepared remarks about how the <unk>.

Turn on international travel, which has still remained a little bit depressed how that could actually I think he said how that could help gogo, but I'm not sure if I followed that because.

Given that Gogo is domestic given that it's air to ground could you talk about how the return to international travel could be another tailwind free or perhaps I misheard you.

Yeah, and now you have me right a lot of those aircraft actually have atg on them.

And they use ATT till they get outside are covered trains and and then they flip to the international to satellite service. So you talk to the big corporate flight departments, almost all of them have atg and satellite.

Okay, Great and then my last question I guess and that you mentioned, obviously lines fit at all and I know you are well positioned I think the way you put it was to get your fair share of new installed what would you say your fair share is I mean, presumably it's something a lot less than 90 per cent of the installed base that you have.

Today, but how do you think about.

What that fair share ultimately should look like.

Well aircraft debt manufactured for international.

Mission conditions that are totally outside the U S are obviously not going to be part of our fair share and that varies year by year, but that's a fairly large portion of what the oem's produced.

And you have to sort of focus on those that have.

Either primarily are totally north American missions.

And on the light and medium sized jets today.

Honestly, the only option and so that's fair share is very high.

And then and the heavy chats.

Most U S bass heavy jets, not all but most will add and atg system to their satellite system. So we get a fair number of those as well.

Great. Thanks, guys I appreciate the the questions.

Okay.

Thanks Man.

Our next question comes from the line and free content from England. James turn on is open and please go ahead and.

And it's more of the guys.

Alright.

Okay.

<unk>, Yeah go well a couple of questions, obviously pretty innovative on the supply chain management, which is doing some issues out there obviously any.

Problems on the cost side, you guys said, you mentioned funding maybe ordering inventory and early but you are there any emergent pressure from the supply chain issue and the short and medium term.

We haven't.

A greater that day now you'll get.

We haven't seen real pricing pressure.

We are confused.

And you really to look at now 2022 to drive the kind of changes and.

And that are going to be necessary to meet the increasing demand. So.

We're doing some other kind of creative things for example will provide the on a contract manufacturers with components.

To build our equipment that they kept secure on the open market. We're also and put it in 12 to 18 months demand on our supply chain and allows us to identify and address critical shortages well ahead of time. So so we're really trying to get out ahead of it and.

Managing the whole supply chain and the interim ear pieces to income level.

And accommodate the higher demand and receive so we have done some prepayments as I mentioned and brief selected areas on those are individually and negotiated with the suppliers on the people who can benefit from that and are you on that case. Those are quid pro quo arrangements were and we get some free for doing that as well. So it's it's been a very very.

Active process.

Kind of component Michael dinner by vendors.

And so far so good for this year, but we're really trying to shorten the lead time quotes for next year because.

And pressured from customers that day, with Jimmy and like to be able to have the installations happy and more quickly and we'd love to have that happen as well.

And students a little bit and stuff there second to continue on the lines of Scott asked on the on the Lido side couple of the gating factors could also be the Stc's update us as far as when do you think you need to work on some stc's and also what is the status of ESA is out there that you're seeing.

Love status I'd say, it's about 2 years total theirs.

A viable Esa for the business jet market.

Yeah.

And that's the class a couple of different suppliers. So I think that are fairly far along and developing these technologies and.

In terms of.

And the FTC and.

Until you have the antenna designed and and ready to go and you have a <unk>.

From the FAA you can't go get FTC, so that that would be a ways out.

Right, so as far as thinking of revenue opportunities, having discussions with Leo's is good but as far as revenue opportunities we need the USA and then the FCC's kind of timeline it.

Yeah, Yeah, we we don't want.

Look at this opportunity is something that is short term in terms of being able to drive revenue wreck and then I think.

You are talking to me for 5 years out and we'll get more guidance and timelines as we.

Form partnerships and have more concrete timelines.

And file and from me is.

Streaming services significant Consumptions day that you talked about how you're fortunate ever got extra capacity with the mainline stuff coming off with how should we think about any congestion sites out. There are people obviously are consuming as much day as I can as you design. The 5 G network, how should we think about how you manage congestion within the network.

Yeah, and it said key focus of our engineers and and you know, it's all about network design and and how you aim and kenna is and where you put them et cetera. So yeah, there's a whole very complex science around that.

And I'm, probably the least qualified person and Gaza to give you any detail rado.

Yeah, it's a significant consideration and and we plan hard for it and and rebuild around it.

And if you think about what kind of build capacity ability interest what kind of annual growth and and consumption are you assuming.

Oh, Yeah, I grabbed consumption growth about 25% a year and and that's what we put news for our projections.

Going on out, but right now we have a lot of excess capacity and.

We figure that today's network, we could have handled 3 times as many jets as we have on aircraft and I should say on as they have on the on the network now for several years out including that growth. So.

And where we are not constrained in terms of our network and because of the number of aircraft and can handle and.

And on the side of course, there'll be able to significantly improve the speed and deliver it to that sales horcoff.

Great appreciate you guys stay well.

Alright. Thanks.

And extra <unk>.

Our next question comes from the line and can I take from J P. Morgan. Your line is open and please go ahead.

Hi, This is an on air Ratisbon.

<unk>. Thank you for their time first off what is your very hearing about smart guy from its sales channel and then install partner and second with the Fries and you build obstacles might there be the the second half from 2022 and state and could you go into.

And why the $5 million, a cafe, which shifted from 2021 to 2022.

Yeah, I'll I'll start with a smart guy and I'll turn it over to value for the 5 G.

Yeah, and and are out of the static stop taking smart guys seriously a long time and well because they net so many dates.

That they've promised and tons of delivery and their network.

It's not worth taking them seriously so.

That that's number 1 number 2.

The deal is do not like the antenna and they they nickname at the canoe because it's so big now.

There's.

There's benefits and a large antenna witches and you'll get more power out of it and.

Better signal, but.

But the problem is and business aviation and has to be very careful about how on balances size and power.

We've done it is we've got very large ground based on talent. So we we get the power out of our very large arrays for 5 G.

And we minimize the size and the intent on the aircraft and that that's really driven by what the market's told us about and tenants and and what they're willing to put on an aircraft on whether or not.

So.

I think plus guys got real challenges and deal on network I mean, the pharmacy, yes, and that's how it comes out of Duncan aviation. So he he does now.

No people and the industry obviously.

And they've been trying to form partnerships.

And they both have a lot of partnerships, but when we talk to those same people they don't find much substance there.

And and you're on your question about the.

$5 million change and the programs spent so.

Depending on a $5 million capex push it it's the overall spend and the result of that as the Senate and shifted between Opex and Capex service things get and a tweak digit go through the process based on accounting standards and the lines are really what's happening is that we're we're actually to spend with the program planning as it evolves and with it.

Shifting into early next year, so it's really pretty modest changes within the program as we said the same side and we said this is not affecting the delivery date, which is still on the second half of next year. So weird.

Continue to modify.

And refined program and response to kind of what we're seeing and the market and it's really that development, but it has to do with my testing and and those kinds of things.

And just the timing of that.

Great. Thank you.

Hey, operator, let's take 1 more question please.

Channel. Our next question comes from the line is moving to palm on from them and their your line is open these come on.

And.

Okay and very good morning.

Alright.

[laughter].

The topic of competition seems to be the over arching driver of the stock price recently during the quarter Gulfstream announced that it reached a milestone of 500 and <unk> sat aircraft online inmarsat seems to be due.

<unk> Wow and this business jet Wifi market Viasat also announced the win with Flexjet Satcom direct appears to be doing well and all of this took place and you were.

Able to achieve robust revenue growth of 70%, even with several other vendors doing well and so my question is do you think that the business jet market for and play Wifi is large enough to support.

Multiple vendors and do you need to maintain.

90% market share or 80 per cent market share to grow.

And a double digit range or high single digit range.

Let me jump on that so first of all.

The Gulf stream announcement by and like that.

And using and we actually have 1016.

Gulf stream with our equipment on themselves about double and my staff.

The.

Yeah.

We we actually kind of cohabitate with inmarsat items view them as a direct competitor.

You'll find that most most jets that a U S base that have any mindset system and I'll also have a gogo system.

On that end of the market.

Redundancy is important and.

And also like the quality of the day Atg network went over North America, and the fact that debt.

That it's cheaper than using the satellite product from other over the U S. So.

Really cohabitate there I'd say viasat is kind of off right now and they they don't have a global product yet day with all the Whirlwind Viasat 3 gets launched and then day will compete with Inmarsat and then they have Ah, but I'll call service superregional product it with their viasat too.

Product and it's.

And it can come down on market a little bit from her and my stat is into the Super modes, and that's what that Flexjet deal was but they they.

Really don't compete head to head with us.

And I think that's sort of trying to but they don't really have the right product to do it.

It's a lot easier and cheaper to install us and.

By at that and frankly.

The service from L..5 is comparable to what viasat delivering so people don't have a real incentive.

Certainly not gonna switch and and that's only on a new aircraft or would compete head to head.

No salt on the rock Israeli reseller.

Others satellite companies products, so they're very good service organizations.

And.

We have a lot of respect for them, but again and I sort of at the high end of the market and.

Again, we would we would cohabitate sometimes on satellite direct installs.

So again.

It's probably the same as the story for and most of that if you will.

So.

That's the competitive environment now the small skywatchers, obviously, they will be a competitor I think I've talked to a fair amount and the script about some of the issues I think they're going to face.

And.

Did you have any other more does that cover what you wanted to cover Lilly or do you have some other.

Well like <unk> related to what what Lance was asking in terms of almost what percentage of new aircraft that come online are equipped from Gogo and right now that number is probably very high but if in the future.

And for new aircraft, if instead of having.

And 90% market share of new aircraft cause you have.

60% market share of new aircraft that come on line is that enough to continue supporting like.

10% revenue growth.

So first of all we don't have nearly 90% of all the aircraft that come out of the Lam's because.

Almost.

Very high percentage go overseas and they wouldn't put on.

Gogo on them think 30.40 per cent go overseas, so they're not gonna have gogo right and then and.

There are different ways lying fit works I mean, sometimes here and options sometimes your standard.

On the large on the very large heavy jets, we're not we're going to be an option, we're not going to be standard and then on the light and medium sized jets, where we will typically more often be the standard offering so but inmarsat.

J ex is going to be the standard offering on and the large golf strange since it's not us so.

So today.

We and that's why I say, our fair share.

I don't know exact right numbers it kind of varies but we get maybe.

40% of the plane coming off the line and total or something like that would have our systems installed. So we actually have room to grow there and I'm not that worried about a striking the other and it's <unk>.

Question.

So let me ask if the otherwise request, yes, it would need and 80, 90% market share generally to continue growing at 10 per cent and the answer there is no the math is obvious.

Because there's so much on penetrated road and the market for us to grow that others can come in and go as well and we can still so easily maintain on 10% grocery and it's never the end of our 5 year planning model, which we shared on a year and a call we projected on 10% plus growth rate through the 5 year plan.

But at the end of that planning period, you know more than 50 per cent of the jets and the little still didn't have connectivity. So.

There's still a lot of market left and get.

Right and and I think that.

Last comment and you said is particularly relevant and that's why answers. My question is because during during the quarter and I think and a viasat announced that win with Black Flexjet and your stock went down by 10% when it seems that bias that's April.

To win.

Several aircraft and a quarter and inmarsat and others can win.

Aircraft, but that didn't impact you because the market seems to be very under Underpenetrated and that's basically what I'm asking it.

And do you think that these other vendors are able to still win.

Yeah, I'm and and moving that case, the Flexjet planes were not in our addressable market because they fly to Europe that was the whole reason they used right.

That's that's and advocates are Viasat has an advantage that both had to go there and bar slaughter Viasat basically and so on the building.

Not a loss on our part and not.

It wasn't it wasn't business and we were competing for and stuff.

Great and.

Thanks, Thanks Barry.

Yes, and no lettuce.

Okay that was our last question.

This concludes our call. Thank you for joining our second quarter Cole.

Operator, you have and vitamin principles.

And thanks I appreciate it.

Yeah.

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

Have a great day.

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