Q3 2021 Gogo Inc Earnings Call
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Give me and thank you first tanning by and welcome to to take quality of 2021 Go Go Inc Earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation here what was the question and answer session.
So ask a question during the session you will need to press hard one on your telephone I catch Donkey if you require an operator assistance police pressed hard to say, but I.
I wouldn't know like to hand, the conference over to your first <unk> Vice President of Investor Relations William Beatings. Thank you. Please go ahead.
Thank you <unk> good morning, everyone.
Welcome to go goes third quarter 2021 earnings conference call.
Joining me today to talk about our results are <unk>, chairman and C E O and Bury Rohan Executive Vice President and C. F O.
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 should differ materially from those in the forward looking statements on the conference call.
These risk factors are described in our earnings release file.
Filed this morning.
More fully detailed into the risk factors in our annual report on Form 10-K, and 10-Q and other documents we've filed with the S E C.
In addition, please note that the date of this conference call is November 4th 2021.
Any forward looking statements that we make today are based on assumptions at the state.
We undertake no obligation to update these statements as a result of more information for future events.
During the call will present, both gap and non-GAAP financial measures we've.
We've include a reconciliation an explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our third quarter earnings release.
This call is being broadcast on the Internet and available on the Investor Relations Investor Relations website.
At I R. Dot go go 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 online.
It is now my great pleasure to turn the call over to locally.
Thanks, well and thank you all for joining us this morning.
A few weeks ago, we hosted a call to discuss our recently updated longterm financial targets, So I won't repeat those today.
But instead will focus on go the third quarter and why we believe it provides further evidence.
On track to deliver the longterm finance financial targets that'd be recently discussed.
Q3 was it called a record performance.
Go go delivered record total revenue record service revenue record service gross profit a record of that shipment in record adjusted EBITDA.
We also achieved a couple of notable first generating <unk>, both positive net income and positive earnings per share for the first time.
They were certainly helped by the powerful tailwind driving demand for private jet travel, but we were also well prepared to capitalize on that strong demand.
Excellent top and bottom line.
That's platform than four G network are well positioned to meet the needs of our growing customer base.
Take advantage of the accelerating demand for B, a kind of activity.
And a vertically integrated and scalable business model is converting that demand into shareholder value.
I'll begin with a summary of the highlights of our third quarter results then provide some context on the current competitive landscape and go those competitive advantages.
And finally introduced updated 2021 financial guidance, which reflects the impact of continued strong equipment sales and the high margin recurring subscription service revenue that track those detract those sales.
Very well then walk through our quarterly performance and latest Twenty-twenty line guidance before you open to call up to your questions. So let me start in Q3.
With a demand drivers.
Yes, it's been written about in the media extensively recently the business aviation industry is on fire.
Flight counts continue to grow the third quarter flight counts and double equipped aircraft up 8% from Q2 and up 24% compared to pre Covid Q3 2019.
That demand for flights is driving demand for aircraft the fleet operators differing retirement.
Buying as many aircraft as they can in the pre owned jet market and placing ever larger orders for new aircraft with Oems.
That activity is good for Gogo asleep customers want can ask fleet customers, what can activity on those new and use jet and deferred retirement as often retain dugout connected aircraft in the fleet.
But even more impressive is the growth in demand for data on those flights.
In Q3, we saw 78% increase in megabytes consume per day on a network and a 44% increase in megabytes per flight as compared to pre Covid Q3 2019.
Those metrics are driven by a 33 per cent increase in flight hours per day, a 34% increase in megabytes concerned per hour and a 17% increase in the number of aircraft aircraft flown.
Those increases drove all time high monthly or poo, an aircraft or a O L and you have to have the online for though though.
<unk> continues to grow as more than three times as many customers upgraded plan to Q3 as downgraded plans.
Some 2.3 times in Q3, 2020 and up from two times in Q3 2019.
And a T. G aircraft online a O L. Also continues to grow up and hit an all time high of 6154 aircraft at the end of Q3 up 10% from Q3 2020.
That combination of <unk> at a O L growth delivered record total revenue.
87.2 million fueled by record service revenue 66.2 million and outstanding equipment revenue of $21 million.
A strong equipment sales growth that drove us to raise our long term financial targets in late September has continued in our service revenue is going nicely as more of those units are installed and activate it.
I think it's also important to note that once installed and activated our service revenue is extremely sticky from.
From the time, we started computing churned in 2017 until now we've averaged a 0.5% monthly churn rate, which implies a 17 year equivalent life on an aircraft that's driven by high customer satisfaction combined with the fact that it's very expensive and time consuming to install a new system.
All of these factors continued to deal with the long term targets, we shared a few weeks ago. The perfect demonstration of our virtuous circle business model.
Equipment sales, probably expand our base of subscribers.
That in turn generates recurring sticky high margin service revenue, which in turn drives cashflow, enabling us to invest in improving our network, which in turn attracts new customers generates more usage and drives more appointment shipments.
Importantly, we think this demand will continue.
So 85% of today's broadband connected aircraft use gogo approximately 70% of the market still does not have broadband, creating white space for us, but raising questions from investors as to why that penetration is so low.
There are a couple of reasons for that.
First the average age of the aircraft in today's business Aviation fleet is 20 years.
Today's fleet was manufactured before alliance it with Wifi was an option.
Second would go got lost yeah, I found hadn't even been developed and it's like connectivity was considered a business productivity too mostly for doing email and many business travelers didn't even do that.
But it's a different world now today broadband connectivity is likes it and all 28 models of business aircraft and go go with mine fit on 27 up and today passengers insist on being online whether the business travelers using zoo or leisure travelers surfing video intense social media.
I also think advanced platform is accelerating market penetration with customers loving you all five interactive video capabilities for zoom calls and a small form factor out three in driving penetration of the light jet and turboprop market today's G O satellite providers can't compete.
As we talked about a few weeks ago.
Just on these trends, we expect a number of broadband connected D aircraft to grow by approximately 50% by the end of 2025 <unk>.
Have stanley increasing our market opportunity.
We expect to win our fair share of those aircraft by virtue of the competitive advantages I plan to talk about in more detail in a minute.
Namely a unique a T G network and roll out of our new five G network diverse utility of our vast platform and are strong relationships with our customers and distribution partners.
Another important driver of Douglas ability to drive revenue this quarter and hit our targets for the next few years is our ability to meet demand.
Supply chain challenges have been systemic across our industry. However, due to a combination of our long standing relationships with suppliers are common componentry strategy for advance and a strong balance sheet. We secured all the supply we need to not only meat or 2021 demand, but also to meet the 20th.
5% unit growth, we project for 2022 further derisking the targets, we shared a few weeks ago.
Finally.
Most important because of the great work of art Belgo sales and production teams, we've been able to not only meet demand that convert that demand and the bottom line profitability and value for shareholders.
In Q3, we generated positive net income of $19.7 million from continuing operations, which computes to 16 cents a share in a fully diluted basis.
And we achieved record adjusted EBITDA of $48 million, 35% year over year, and 11% above last quarter.
We expect a positive net income going forward as a high margin service revenue growth and our operating costs remain relatively fixed driving operating leverage and strong growth in cash generation.
We're proud of our results and then momentum or building and I'm really proud of the Gogo team, which continues to rise to the challenge of exceptional demand while preparing to deploy the world's first five G. A T. G network, our team's focus on our customers needs and on continuous improvement is the key ingredient that drives our success.
Now I want to turn our attention to the B a competitive landscape.
[noise] Gogo has developed three main competitive advantages and are 30 years, serving to be a market, including our proprietary a T G network.
Are unique in future proof advanced platform.
And are deeply embedded relationships with our Ali M a dealer partners.
Together these advantages enable us to provide an unmatched value proposition to be a manufacturers dealers owners and passengers and importantly, we continue to invest in strengthening Egypt.
So let me start with our proprietary network.
Today, we operate the only air to ground network in North America, and we have exclusive licenses to the only radio spectrum authorized to provide a T. G connectivity to aircraft in North America.
The advantage of a T. G. R that first it provides lower latency than our current G. O satellite competitors can deliver by virtue of having grounded tennis is or no more than 200 miles from the aircraft as opposed to G. O satellite, which are 22000 miles from the aircraft.
Second because of that close proximity R. A T G airborne antennas require less power than D. L in tennis, which allows us to have much small form factors and to fit on far more makes and models of aircraft, thereby having a much larger total addressable market than our G O competitors.
And finally, a T G cost much less than G O satellite based connectivity on and equipment installation and service basis.
I should add that it's not easy to build a T. G network, nor is it easy to find the operating losses, a network operator suffers between leading up their network and activating enough customers to cover their operating costs.
And go those case, we need to raise more than $800 million in equity and at that time, we were fortunate to have positive margin from providing a T. G to commercial airline customers cover some of those costs.
Okay keep pillar of our strategy is it we will continue to improve the performance of our a T. G network to keep pace with customer expectations Ace of what they experience on the ground.
To that point, we remain on track to deploy the world's first five G. A T G network with nationwide coverage from 150 sites and the second half of 2022.
And the third quarter Guggle achieve several significant deployment milestones.
We moved from the design development phase into qualification and certification of the aircraft hardware and ground stations. We've placed orders for all of our seven tower Testbed equipment and that gear is on its way for a Q4 buildup.
Third we released installation manual service pricing and hardware pricing to the aliens dealers.
Beyond deployment.
We've made significant progress of course are across our five G program.
Based on recent testing and modeling across eight commonly traveled city pairs, we announced that we expect Gogo five G to deliver approximately 25 megabits per second on average with peak speeds in the 75 to 80 Megabits per second range significant improvement from the two to seven megabits per second that Guggle events L five customer.
<unk> interviewed by the Boston Consulting group reported the experienced today.
As business travelers increasingly required seamless video conferencing, and VPN access and leisure travelers expect living room quality streaming capabilities for accessing video intense social media Gogo five G data speeds will be a top differentiator for gogo.
We also announced jet edge, the largest operator of Super midsize and large cabin private jets as our last customer.
Jed edge has advanced L. Five installed across the majority of its managed large cabin fleet and we'll upgrade 50 of them to go go five G postwatch.
A key selling point for the advance L. Five platform is that the upgrade path do I go about five G network is much simpler than installing a new IFC system.
You replace the two current L five and tennis with new 13 inch and tennis that fit in the exact same location that C. L five and tennis and had a small box inside the aircraft.
Wiring access points and May now are you all stay the same the rest is just a software update that is done seamlessly over the air.
And go go five G is.
Is not the end of our a T. G enhancements, we have a roadmap of future enhancements aimed at improving the performance of our a T G network for years to come.
Our second major competitive advantage bizarre advanced platform.
Like Apple products advances of software centric platform that includes a set of hardware devices built on common components that all operate on a single operating system that transcends the cloud and all of our devices.
Advanced allows us to first provide a whole new level of customer service service, which drives stickiness.
Second allows us to seamlessly add apps over the air to drive increased <unk> and or stickiness and third allows us to add new network technologies as they evolved to provide more capacity coverage and performance for our customers.
A good example of our advanced customer service features would be the automated ticket creation feature assistant constantly monitor itself and is it identifies issues. It auto creates trouble tickets, thereby allowing us to take corrective action often before the customer even knows they have a problem.
A good example of seamlessly adding apps to drive stickiness is that a recent mix app, which allows flight departments to remotely scale different levels of service to different users on the aircraft, thereby ensuring that each passenger gets the appropriate experience.
And a good example of advanced flexibility and incorporating your network technologies would be the Leo networks that are being launched over the next few years.
Advanced could support of Leo network aggregated with our a T. G network over North America to deliver more bandwidth in either network could deliver on its own.
It would also expand our total addressable market to include the 14000 business aircraft that are registered in predominantly fly outside North America.
Advanced gives us a tremendous advantage addressing the Leo opportunity because we could add an electronically gerbil antenna Esa on top of the aircraft and run wiring down to the advance L. R U and that would be the extent of the hardware upgrade the rest of the upgrade would be completed with an over the air software update.
Our third major competitive advantage is our relationships with dealers and Oems I discussed only owns a moment ago. So we'll focus these comments on dealers and M. A R OS.
As we said before Gogo has a high quality network of 120 dealers worldwide is mutually profitable relationships are incredibly valuable it took many years to build a.
Distribution partners are invested in Gogo and they know we can be relied upon to deliver quality products on a timely basis and that those products will make their customers happy.
Evidence of the strength of these relationships with the announcement by Duncan aviation the largest independent MRO in the United States.
<unk> all of its full equipment advanced L. Five stc's to include go, though five G, which will cover more than 30 aircraft models, including aircraft manufactured by Bombardier Gulf stream to so and tech strong.
Now, let me turn to the competitive landscape.
Competitors fall into two buckets G O satellite service providers and the potential new a T G service provider.
That's G O satellite service providers their main advantages that they have broader coverage than gogo. However.
However, since 87% of all flights are in North America goes oak and still serve most VA aircraft missions.
As mentioned earlier go goes advantages over G O R. A smaller form factor so a lot of enough to serve all makes and models of aircraft.
G O providers is heavier larger farm factors in a limited to larger jets.
B a significant latency advantage, which is very important for interactive video applications like zoom and see Gogol is cheaper on all fronts, including equipment installation and service.
Now, let's turn to the potential new a T. G entered take face many challenges starting with a lack of credibility with the distribution channels and customers.
After originally announcing that they would deploy a nationwide network in 2016. They have missed a series of law states over the last five years and have recently said they would complete their network by the end of this year.
But have now slipped once again and are now saying that will complete the network by the end of the second quarter next year.
As a result of these delays just potential competitor has no credibility in the distribution channels and they will need to complete and successfully operate their network for some period of time before they can regain credibility.
Even then they'll face challenges they recently announced their network with generated.
Generally achieve speeds in the five to eight megabits per second range with peak speeds up to 50 Megabits per second.
Their speeds are roughly equivalent to what our L. Five customers on our four G network experienced currently.
Well below the average speeds and the 25 Megabits per second range in peak speeds of 75 to 80 megabytes per second that we expect customers to experience with go go five G.
Besides our distribution channel and speed advantages. We also expect it will face challenges around the size of their antennas and they will need to raise considerably more capital to finish that network and operated to profitability, which given all the other challenges. They face is a challenge in its own right.
More broadly in the market, we also see exciting opportunities to partner with potential new entrants into Leo satellite service space of.
Of the three Leo providers launching are likely to launch over the next few years two are committed to be to be models and we are in discussions with them about us providing a leo global broadband product to our vertical market.
This would allow us to add the 14000 business aircraft outside of North America to a total of vegetable market.
And to provide an integrated advanced atg and Leo product to the North American market can we think we'd be especially valuable to north American heavy jets fly globally and use both a T G and G O satellite solutions today.
The thirdly, all providers Starlink, which is currently in beta test in pursuing the global broadband market estimated at $350 billion in revenue. This year would that direct to consumer model. They have discussed also pursuing the $80 billion military Gov market. The 25 billion dollar connected car market and then.
7 billion dollar U S commercial aviation market among others.
Business aviation connectivity is tiny compared to those opportunities.
Estimated that less than 500 million in service revenue this year.
Given the relative size of the be a market opportunity to given the da business aviation connectivity is highly regulated as complex distribution channels and it has a highly fragmented customer base, we'd be surprised if entering our market where a high priority for starlink.
Meanwhile, we think we are well positioned to launch a leo add onto our advanced platform given our current distribution channel relationships given that we will have a large advance installed base. So it would be Leo ready and given that we will be able to leverage advanced certifications for a Leo product just like we're doing today for five G.
Now I'll touch briefly on our updated 2021 financial guidance before turning the call over to Barry.
This morning, we raised our 2021 adjusted EBITDA and free Cashflow guidance. Another good a full year revenue is expected to come in at the high end of our previous guidance range.
This is the third time, we've raised 2021 guidance and are raised expectations are driven by significant growth. It goes all equipment sales supported by strong industry Tailwinds and growth of the high margin recurring subscription service revenue that follows activation of our equipment.
That margin growth and the relatively fixed nature of our operating costs creates tremendous operating leverage and will drive substantial cash generation. After completion of our five G network in 2022.
A brief note on next year, we expect continued strong revenue growth would like to remind investors that it will be an investment years, we complete our five G network.
And those investments will new growth and our adjusted EBITDA net income until the five T tower investments are largely installed.
We're excited about the future and goes his ability to deliver for our customers shareholders and employees as we execute on our strategy for long term value creation.
With that I'll turn it over to Barry.
Thanks Oak and good morning, everyone.
As Oak mentioned, the Tailwinds driving the business aviation market are strong and by all indications are sustaining and picking up momentum.
This coupled with Gogo business execution creates a strong foundation for continued profitable growth.
As we've demonstrated our financial model is a virtuous circle strong equipment shipments drive high margin recurring service revenue leading to strong cash flow that we can invest in enhancing our network, which in turn attracts new customers generates more usage and drives more equipment shipments.
A record third quarter results demonstrate that our model aspiring and also wonders as we reach an exciting inflection point for the company.
Which was a gogo generated positive net income and EPS for the first time is oak mentioned.
Strong equivalent shipments are derisking or long term targets and.
And we continue to strengthen our balance sheet to enhance our foundation for innovation investment in future success and eventually cafe returns.
I'll walk through the key results of the quarter, starting with the top line, which are a reflection of the accelerating strength of the business aviation market and go those unique ability to capitalize on that growing demand.
Total revenue for the third quarter was a record $87.2 million, increasing 31% year over year and 6% sequentially.
Leo by strong growth in both service and equipment revenue as demand continues to exceed our expectations.
A record service revenue of $66 $2 million in the third quarter represents an increase of 24% year over year and was driven mainly by more advanced units coming online.
On a sequential basis, our third quarter service revenues grew 5%, excluding the one time benefit of $1.8 million in the second quarter from recognizing deferred revenue from a specific customer contract.
We also have a recurring subscription based service revenue is a key longterm value driver of our business.
[noise] Atg aircraft online reached 6154 of 10% compared to the third quarter of last year, and 2% compared to the second quarter of this year.
New customer Activations remains strong representing over 60% of total activations during the quarter, which is in line with the last several quarters.
As you said over the past year penetration of the advanced platform into both of our installed base and with new customers is a centerpiece of our long term strategy.
Advanced provides unparalleled extensibility as our technology evolves laying the foundation for even stickier enduring relationships with our customers.
And the third quarter total advanced units online grew to 2237, an increase of 46% compared to Q3 2020.
This is comparable to advanced growth for the last five quarters, which range from 42% to 51%.
Advanced units comprised 36% of total a O L. As of September 30th 2021, a meaningful increase from the 27% a year ago.
As we grew our a O L. <unk> also group to $3264, representing an increase of 9% year over year.
Excluding the one time benefit from last quarter's deferred revenue <unk> increased 2% sequentially.
Looking ahead, we expect our 2021 revenue to be at the high end of the guidance range, we announced last quarter, reflecting our expectations that service revenue for the full year 2021 will grow at least 20% over the full year 2020.
Turning now to equipment revenue Google.
<unk> delivered very strong equipment revenue of $21 million, a dramatic 59% increase year over year, and a 19% increase sequentially due to strong demand for advanced L. Three and an alternative products.
We had a record 264 events product shipments in the third quarter, which represents 58% growth from 232020 and 33% grow sequentially.
It's worth noting that our expectations for 2021 advanced shipments are now more than 30% ahead of her original 2021 internal budget.
Or 2021 revenue guidance reflects equivalent revenue for the full year of 2021 at 30% above 2020 levels.
The strong performance is based on the underlying strength of the market as well as the seasonal dynamics of our business.
We generally see equipment sales back loaded to the second half of the year and we expect that same seasonality to occur this year.
Because we shared at the end of September when we updated our long term financial targets, we expect continuing strengths and advanced shipments with growth of 20% to 25% next year and this on top of this year's strong performance.
Let me add one final point regarding equipment shipments and that is to underscore the important results achieved by our production operations team in the face of the global supply chain crisis.
As Oak described our efforts to efficiently manage our supply chain benefit from our advanced platform hardware strategy, which is focused on standardizing common componentry across a L. Three and you will find products to manage our costs and drive quality.
Google is also committing $10 million in cash for additional inventory purchases during 2022 to ensure we meet demand and to reduce our quoted lead tickets.
The outstanding results achieved by our supply chain team certainly derisk, our long term guidance by ensuring that we can deliver on equipment orders that already stretch well into 2022.
Now I'll turn to a discussion of our profitability for the quarter.
Are stronger than expected performance in the third quarter reflected the power of our business model, which flows from a recurring high margin service revenue.
Global delivered service margins of 80% in the third quarter, an increase of 300 basis points sequentially.
So to increase was mainly driven by one time $2 million catch up credit for Federal Universal Service Fund regulatory surcharges from which we have recently become exempt.
Telecommunications companies must pay a percentage of the Interstate and user revenues to fund due.
Due to changes in our operating structure in 2020 prior to the sale of the CA Division Gogo was now exempt from these surcharges and this credit was for the seven months from January through July of this year.
Beginning in August 2021, and going forward, we will have $3 million in annual savings as a result of the exemption and this impact was favored into the wrong factored into longterm targets, we announced in late September.
Excluding this credit service margin would've been in line with expectations and approximately even with last quarter, 77%.
As we've said previously we anticipate service margins come down to the mid seventies in the fourth quarter of this year and four 2022.
And then to increase over the longer term as we benefit from increased operating marriage.
Okay.
On the equipment side margins increased to 41% in the third quarter, an increase of 320 basis points sequentially, driven by strong equipment sales and mix more skewing more significantly toward advanced products in line with our strategy.
This profitable customer acquisition is a significant differentiator of the unit economics of our business, particularly relative to traditional telecom and other digital infrastructure businesses.
We continue to expect equivalent margins for the full year 2021 to be above the 2020 levels, even as margins in the second half are expected to be lower than in the first half of the year largely due to mix between hillstreet front of equipment shipments.
It's important to note that while equipment margins are lower on the less expensive it'll three product service margins are quite similar across the two product offerings, which of course is most important for our overall business model.
R. L. Three product is delivering on its strategic objective of penetrating the market for smaller airframes as demonstrated Berg continued momentum and personal jets, including our previously announced agreeing with serious.
As well as the Honda jet announcement oak referenced on this call.
Moving to operating expenses Gogo third quarter, combined engineering design, and development sales and marketing and G&A expensive $26 $7 million increased 16% year over year.
This was primarily due to one time catch up and non-cash stock based compensation expense related to vesting that occurs unemployed retirements and primarily impacted GMA.
Q3, Opex spending did benefit from a reduction of $3 million relative to our previous expectations half of which are permits savings and happening differed future periods.
We expect we continue to expect G&A to decrease in 2021 relative to 2020.
We also remain on track to deliver are targeted $10 million reduction in G&A, excluding non-cash stock based compensation from the 2020 level by the end of 2022.
Now I'll provide some additional detail on our Gogo five G program and spending profile.
As I've mentioned, we are on track to deploy our five G network in the second half of 2022.
The third quarter, we spent a total of $1.8 million, an external gogo five G development and deployment costs split evenly between Capex and Opex.
Two factors contributed to the level and timing of Google finds you related spending.
First we have reached the accounting requirements to capitalize gogo prior G spend earlier than originally budgeted we demonstrated technical feasibility in early 2020 and achieved R&D completion milestones for Google five G. In July of this year.
As a result, we expected capitalized $3 million a Google five G costs in 2021 that were initially anticipated to be treated as opex.
Secondly, we are expecting that some opex in capex been projected previously in Q4 2021 will shift to the first quarter of 2022.
I want to be clear that these shifts in our spin schedule do not change our expectations on the timing of network deployment.
As we look ahead or Google <unk> spend is expected to ramp significantly in the fourth quarter and to peek in the first quarter of 2022 in anticipation of our launch in the second half of next year.
We expected over 90% of our total Gogo five G investment of approximately $100 million will be completed by the end of 2022.
It's significant that we are able to fund the entire remaining amount of Gogo <unk> deployment costs from internally generated cash flow.
To reiterate our long term expectations. After five gogo after Gogo five G is launched we expect ongoing capital expenditures and the $15 million to $20 million range annually supporting an even stronger adjusted EBITDA to free cash flow conversion rate in 2023 and beyond.
Now onto our bottom line.
Our adjusted EBITDA of $48 million was a new record and represents a 35% increase year over year, and an 11% increase sequentially.
This record certainly reflects the strength of our business model and the underlying trends driving our business.
As I mentioned, a few minutes ago, our third quarter. Adjusted EBITDA does include some benefits that we don't expect to recur, namely the 2 million dollar credit for federal Universal service Spoon surcharges.
Our full year of 2021 guidance for adjusted EBITDA, which we increased to a range of $140 million to $145 million from our previous guidance Ah more than 130 million reflects.
[noise] reflects are somewhat lower adjusted.
The fourth quarter versus this quarter.
This is due to the one time surcharge credit in Q3, and lower equipment margins and higher operating expenses related to five G deployment expected to be upcoming quarter.
As we mentioned earlier in the call go-go achieved a tremendous milestone in our third quarter, we achieve positive net income for the first time.
During this quarter received $19.7 billion net income from continuing operations, which translated into 18 cents and basic earnings per share and 16 cents and diluted earnings per share from continuing operations.
Free cash flow for the quarter was $24 $6 million. This reflects our strong top line growth and healthy 47% adjusted EBITDA margins as well as the impact of the comprehensive refinancing we completed in April which materially reduced our annual interest expense and enhances our strategic and financial.
Flexibility.
Although will certainly be variation from quarter to quarter, particularly due to the timing of or go to a five G investment.
Our expectation is to deliver positive annual free cash flow going forward.
Based on this performance, we have increased our free cash flow guidance for 2021.
And as you know, we substantially increased expectations for free cash flow in 2023, and 2025 several weeks ago.
Now, let's turn to a discussion of our balance sheet.
Google is in a very strong liquidity position with $133 $2 million in cash on hand as of September 30th and are 100 million dollar revolver remains undrawn.
As of the end of the third quarter, we had approximately $826 $2 million in outstanding debt, including the $723 million term loan be we recently put in place in approximately $103 million in outstanding convertible notes.
Our strong financial performance has reduced our net leverage ratio to four seven times based on our year to date annualized results as of September 2021.
This is a dramatic improvement over where we were a year ago, just before the CA divestiture.
Based on Annualizing three quarters of adjusted EBITDA from continuing operations for the first three quarters of 2020.
Our net leverage ratio for continuing operations was $10. One time since it's September 30th a year ago more than double our current leverage ratio.
I am also pleased to highlight one of the provisions were able to negotiate as a part of our most recent financing.
Towards that our interest rate would decline as our leverage declines.
During the third quarter are lower leverage ratio enabled us to achieve the maximum 50 basis point reduction in the interest rate on our term loan b as provided by our contract.
Our interest rate will be reduced to LIBOR, plus 3.25% with a 75 basis 0.1 of our floor and a revolver commitment fee will be reduced by 25 basis points.
These reduced rates will take effect of November and an aggregate will result in approximately three $8 million in annual savings.
Assuming we settle conversions of $103 million and convertible notes maturing in May of 2022 and stock is currently plan.
We expect our net leverage ratio to be below four times by the end of 2022.
With this final step in our comprehensive refinancing plan our annual interest expense will have been reduced from $111 million before April refinancing to approximately $30 million annually.
After the Equitization of the remaining convertible notes and reflecting the reduced interest rates due to a lower leverage ratio as I mentioned a moment ago.
Are strong balance sheet and financial performance afford gogo unprecedented levels of strategic and financial flexibility.
On previous calls we indicated that we would pursue a balanced capital allocation strategy focused on for primary areas in the following order of priority.
First is enhancing our network through the deployment of Gogo Fry G.
Second is reducing overall leverage to inappropriate operating level.
Third is strategically investing in our business and ways to capitalize on market opportunities or further strengthen our competitive position such as the global broadband opportunity.
Unfortunately over the longer term considering returning capital to shareholders is appropriate.
We have made considerable progress on the first two of these with Google <unk> on track and on budget.
And the natural deleveraging matters occurred on an accelerated basis with a stronger than expected operating performance.
We are now in a position to more actively consider the latter two priorities.
Over the coming quarters, we will continue to assess value, creating investment opportunities like the Leo based global broadband opportunity.
We will then be in a position to begin considering the potential timing returning capital to shareholders in the context of a targeted capital structure.
With that I will provide some additional color on our updated financial guidance.
As we announced in our press release. This morning, we expect our full year revenue to come in at the high end of the $325 million to $335 million range. We had previously communicated.
We also raised or 2021, adjusted EBITDA guidance to arrange a a $140 million to $145 million versus at least $130 million as we've previously expected.
This guidance excludes approximately $2 million of separation migration costs related to the sale of the CIA Division.
In terms of free cash flow, we now anticipate generating at least $40 million in free cash flow for the 2021 fiscal year compared to the $25 million to $30 million to which we had previously guided.
And finally, given the Google <unk> spend dynamics I spoke to earlier, we know anticipate 2021 capital expenditures at the low end of our 20 to 25 million dollar range.
But we plan to provide full year 2022 guidance on our next earnings call as we normally do we thought it would be helpful to offer some high level perspectives as.
We finish out 2021 and look forward to 2022.
We continue to expect significant top line growth.
However, we wanted to be clear that we don't expect our bottom line to continue to grow at the pace we are delivery in 2021.
For one we will not have the approximately $4 million one time benefit as we did in 2020 with a deferred revenue recognition and USAF surcharge credit.
We expect service is equivalent margins to contract somewhat next year, and we will be significantly wrapping ramping investments to deploy our Google five G network.
In addition, Google will be returning to more normalized postcode spending on sales and marketing, particularly as we continue to commercial lines Google for I G.
And we anticipate that meeting the significant growth in advance unit shipments expected in 2022 will require some investments of working capital.
Over the longer term, we continue to drive towards the long term financial targets for revenue growth adjusted EBITDA margin in free cash flow, we announced in late September which remain unchanged.
As a reminder of the long term financial targets are as follows.
Revenue growth at a compounded annual growth rate of approximately 15% from 2022 2025.
Annual adjusted EBITDA margin, reaching 45% in 2025.
Adjusted EBITDA margin made declined modestly from a higher than expected level achieved this year due to the investments we describe for next year for example, but our target of 45% in 2025 remains unchanged.
Free cash flow of approximately $125 million in 2023, followed in the deployment of the Google Five G network in 2022.
And approximately $200 million in 2025.
In conclusion, our business is really hitting its stride leveraging our unique competitive advantages to capitalize on the positive trends driving growth in the attractive underpenetrated B a merger.
Our equipment shipments from supply chain strengths continue to Derisk, our long term financial projections as more aircraft come online and feed the virtuous circle that creates value for our customers shareholders and employees.
Before we turn the call over for your questions I'd like to thank the Gogo team for the outstanding performance, we delivered this quarter again.
Are continuing progress, including reaching the exciting milestone of achieving positive net income is a testament to the hard work of our talented team. So thank you.
Operator. This concludes our prepared remarks, and we are now ready for our first question.
Okay is there any more.
Shop, you will need the press, Taiwan telephone against higher one telephone.
Question are you asking a question has been answered press the pound a husky.
Yeah first question comes from the line is Neal Cusack from G. P. My Danielle Hamilton.
Good morning.
This is a meter fulfill I wanted to know when you look at your 2022 go for the five G launch, where the puts and takes Susan hitting not and how did you do a supply chain.
The date for that and then in addition to that another one of her. Many are you guys can you confirm that you're seeing revenues reminding tostada agreement and should not ramp as the airlines started to come back in quite calm.
Thank you.
Thanks to me I'll take the first part of that very deal with the Intelsat part.
[laughter].
I wouldn't say that we have any puts and takes on when we're going to deliver we're very confident in delivering the second half.
Of of.
<unk> 2022.
We had a five G chip issue that's been resolved that's being delivered on schedule that.
With a six month delay of that chip, but we actually manage the project still stay on schedule and we're very confident in that.
And the other the second part of that question was supply chain.
There's a supply chain we are in very good shape, we have.
Secured all the supply.
All parts required to meet our commitments this year and for the first quarter next year and second quarter next year and for Q3 and Q4 next year.
We have secured.
All parts needed to meet our current projections of 25%.
Net growth.
If we.
Are actually putting demand into our system now for greater than 25% growth in case, we see a similar surge in orders as we have this year next year and so are we still are a bit yellow on that surge an additional demand if that occurs in Q3, Q4, but but we are working that down and.
I think we feel pretty confident we can handle it and then we're ordering of already we're ordering 18 months ahead right now in order to secure supply and so we're now actually placing orders for for demand for 2023. So.
So.
Feeling pretty good about that and we I think we performed really well in that area as far as five G itself.
Most of the supply right now is around the network and the actual equipment to run the network now that's coming in right now on schedule.
In terms of the airborne equipment.
That's all in the certification process right now, but we don't see a lot of.
Any supply.
Issues there is that we are.
We have very focused.
I'll put it that way a three very good vendors, who are supplying us on that projected and and there are no alarm bells whatsoever remembered also that leverages a lot of the same componentry that we use for our events L five and they'll three products. So.
The supply chain is pretty consistent across five G and advanced.
We feel good.
And a mirror on your second question regarding the until Sept revenue, Yes that is on track as a reminder, we have a 10 year contract with them and the amount of the minimum's grow over time to a total of $177 million over that 10 year period.
On track for that and there is a step up in that grip sure amount.
G a deployment it takes place.
Okay. Thank you just congrats on the corner.
Thanks, a lot in there.
Our next question comes from the line is cops from Roth Capital Hill line is now open Hey, good morning, nice quarter. Thanks for the color is always and thanks for taking my questions.
Just a real quick clarification looking to 22 talking about 20% plus unit growth. It sounds like you've got the supply chain Whelan order I'm wondering what you have in terms of visibility to order coverage at this point in time and kind of how that breaks down when you think about the attach right on new aircraft coming off versus retrofits, and then I had a couple of follow ups.
Okay I'll take the beginning of that in right now.
About 60% of our units are committing to our aftermarket in about 40%.
Blind fit in that spend kind of a skew we've seen develop here is I think we get more penetration.
In older aircraft and the market so that.
We would anticipate that to continue that you want to talk about the over the order flow.
Yeah.
Turns of the orders Scott.
Strong backlog actually the highest we've had in our country's history and.
The lead times are a bit longer than where they had been made normally run from the time that somebody to shipment one to two months those are stretching out closer to six months now is the demand is so significantly scripted previous expectations, but so we are now taking orders to be delivered in may timeframe, but with supply chain.
Work.
We're continuing to work that down and expect to be able to return to just those shorter lead turns over.
It's really based on the booming demand for the equipment that we see great. Thanks, It's very helpful and lastly, if I could.
Looking at the equipment gross margins are very high of 40%, but then you start to talk about.
How advanced is growing both for the <unk> five and then the low churn rates are translates to basically aircraft to 18 years in the field.
And what you can do with you advanced in terms of the easy upgrade to five G. So basically you're securing the customer so I'm wondering how you're thinking about.
Being more aggressive on the advanced front, because that really locks in your customer effectively for the next 10 to 15 plus years. If you accelerate that do you get more aggressive on the gross margin or if you don't have to at this point in time simply because of the supply demand.
Balance within the industry and also as part of that I'm kind of wondering what you think the overall installation capacity from an industry standpoint is in 2022. Thanks.
Yeah I'll jump in at the start of that I mean, driving a vast penetration for all the reasons you mentioned Scott is a central pillar of our strategy and.
Right now frankly, yes, we don't we don't need to drive a lot more orders just because.
There are some supply chain constraints now we are trying to manage ourselves to well first of all we have managed ourselves to 25% unit growth above this year next year and we are actually trying to now thanks, Kevin can satisfy demand in case it is greater than that.
Do we have in our guidance.
Talk about low.
All of our equipment margins over the next couple of years and that is built.
Built in partly in order to.
Take account of incentives, we might create in order to get people to upgrade from the classic products too advanced products.
And the one thing I would add to what you mentioned as benefits of advances.
Because of with multi bearer capabilities, we think we could add a global broadband Leo product relatively easy easily as an add on to that which we think gives us.
And our space and is is Ah.
The way, we can fend off potential other.
<unk> competitors coming into our space so.
Getting people to mobile advances as a major thrust, it's growing but 46% this year, which is great.
We hope that by the end of next year of to 50% of our roughly 50% of our installed base and growing and we're going to keep driving that.
And Scott to your question on the margins, yes, as as you know the service margin is really the driver of the overall economics. It accounts for about 90% of the gross margin dollars. So that's that's really the third factor that drives the value creation for go there.
In terms of the margins on equipment. They were high of this quarter as we've said, we expect those to come down.
Even as we.
Lance Google a R. G cause it's very much worth it to us to invest in driving the conversion <unk> and also dragging the advanced penetration because for all the reasons, we've talked about so as we get more advanced products or minded as to the stickiness of the customers.
Future proof enables superfreighters, we describe so but even as we see those.
Equivalent gross margin percentages.
Compressing some mud over the next couple of years, it's very good for the overall business model.
Thanks, Greg.
Yes, and then in terms of the MRO capacity I think than others.
There is there's plenty of MRO capacity to.
Pick up kinda install I don't think that's really an issue and the other thing is that you have to be a compelling.
Product for them to sell something.
Something that they make money on and that makes a customers happy and right now we're really in the cat bird seat on that and the distributors are very happy with their relationships with Gogo. So that's the way to keep another another sort of weapon and driving that penetration.
And right now, we don't really see that as a limiting factor.
Great. Thanks, guys nice quarter.
Thanks, John for Ya.
Your next question comes from the line of <unk> panties from Lehman teens. Your line is not well.
Hey, guys. This is Brent on for Rick Good morning.
Ian D came in a little bit lower than expected. This quarter were there any deferred costs within that category of one timers.
And how should we think about that training going forward.
Yes, it did come in a little bit lower there were a couple of reasons.
Some of which we pointed out.
<unk> was that we were able to capitalize more of the costs than we had previously anticipated because of having cross.
Technical feasibility proof and stones tour, the Google point of view products of uncertainty help there was a couple of million dollars.
Will be deferred.
Some of which will be deferred into next year. So we do expect <unk> spending.
To ramp.
In the next quarter.
As we continue to invest in the government bungee pronto.
Got it thanks and then my other question is you guys have talked about some of these new market that could provide upside to your expectations generally the Asian and international.
Connectivity to the cockpit.
Just could you provide an update on where you are most encouraged and which of these markets. You think could provide the most upside two year long term expectations.
Yeah, I'll take that the I.
I think the one that would have the most upside would be the global broadband initiative, however that.
Fill in the business case stage and we have not formed any former relationships with the external parties are or gotten board approval to move ahead with that that's something we'll we'll talk about more detail when we get there where we are having the most success right now of course is moving down down market.
And by that I mean into smaller aircraft, that's both general aviation aircraft like the Sierra visit jet.
And small business aircraft like the Honda Jet STC said, we announced.
A couple of weeks ago. So right now, we're having good success, where where an area where it's hard for our competitors to compete and that is an aircraft that require small form factors like R. A F L. Three.
And we're going to keep driving that and we keep look at looking at other ways. We can modify our products to further drive penetration there. The two big things were so far I've been the small form factor L. Three.
And then the lowering of the of the.
The flight floor.
Altitude floor from getting connectivity to 3000 feet.
Because smaller planes tend to fly shorter routes and not get over 10000 feet very often so.
There's other things we can do we are working on to further drive that so.
Those would be the two big ones.
The DVD by far the biggest that would drive probably wouldn't start driving revenue until the second half of the decade, but we think accelerate growth dramatically for the second half of the decade.
Great. Thanks.
Your next question comes from the line of movie Depalma from William Leo lines. So open.
Barry and well good morning.
Deliberate mourning mourning Lily how are you doing.
Great have you been able to test the bonding of your license or megahertz of 850 megahertz band spectrum would be the unlicensed.
60 megahertz of.
Wi Fi spectrum and.
Have the results and positive.
Bonding work.
Yes actually aggregation.
Not bonding there was an engineering difference between the two of them.
That's actually.
Right now have.
First and add all the light aircraft through through tower too through tower equipment to data center.
Setup, and we're testing that right now Louie so more to come on that in the next call.
Great and Uhm Oak you also mentioned how the existing Avon system will easily support future Leo broadband and tenants in systems or Avon also support the new Iridium service Albans service and are you still working on developing your own.
Iridium service and tenants.
It could support service or any other.
With a with a with a new antenna just like the Leo.
Distillation was required to get the antenna.
We're not.
We were we're not a service dealer I don't think so.
We have we still sell a lot of iridium product and we have a.
Plans around what I'll call the narrow band that I don't think we're really ready to talk about yet.
So.
But that would not at.
A lot of bandwidth for us like like Leos wood. So we're not focused on now.
Right and one final one financially for for Barry even with this quarter's upside do you start project that you're 2022 revenue growth of the upper end of your.
And a 15% longterm guidance growth range.
Well, we actually printed increase the expectations tour service revenue growth, saying that we expect it to be 15%.
On each year compounded from 20.
To forward. So so yes, we do expect it to be after that.
50 per cent range for next year.
Awesome.
Okay.
Thank you.
Your next question comes from the line of Jonathan of Iraq from Common line is now open.
Hey, <unk> Jonathan in for Lance Congrats on the on the quarter.
My first question is.
What are the trends that.
The company in terms of Unix unit expansion in pricing into the fourth quarter and perhaps any any viewpoint on how the beginning of 2022 look in terms of I'll get an expansion in pricing.
I'll take it.
You are talking Jonathan about them.
Basically what we see happening in the Harper overtime.
The Dutch aggression in the fourth quarter and going forward.
What are the trends that you're seeing right now and maybe what we can expect in 22, the beginning of it at least.
Just to put it in context.
R. Arthur has grown over the last number of years and.
A big part of that is it is people have this issue.
Two or more bandwidth that they are upgrading plans. So we have seen that and expect that to continue going forward as as you look at the longer term there are kind of.
Two upward pressures on <unk> and one downward pressure, but also for a good reason to upward pressures are the continued migration too.
Higher value higher megabyte plans, which we have seen including the addition of the of the Australian plans. So we expect that trend to continue as people.
Want to consume were megabytes. The second uplift is from Google five G and so we are.
Confident that we're going to be able to charge more for Google <unk> because of the increased performance. So those two things will lift her to overturn the downward pressure as as we get into.
The major turboprop market as we've talked about those planes as you know furniture or a shorter rent the average revenue per user tends to be lower as a result, but very very importantly.
Revenue per megabyte is comparable to the other so it's very quality business, but that will have that identity, if they're done or if we were going for but it as we go forward from this point over will return we expect to repeat it to to continue to increase.
Understood. Thank you that's very helpful and just two more on my end how.
How many L. Five were installed during the quarter and the last one is in terms of the 50 prints that 15% of revenue Calgary.
From 2023 25, what percent of the market share does that imply thank you.
Yeah on the.
Oh do I take the second part of that question on how we see.
Unit volume Murphy showed wrote in overtime.
Yeah.
Will pick up the data point on installed.
We don't really look at market share as an internal measure to be honest.
Most something that investors are concerned.
We focus on unit growth and growth in the number of service plans involving pricing of those service plans. So.
There is a lot of run in this market. If there are other entrants 70% roughly of the market is is on penetrated today and frankly.
Project, we've shared our projections through the end of 25.
And at the end of 25, assuming success of a potential APG.
Entered in assuming that our competitors.
Succeed in their plans.
Into their current growth trajectories.
50% of the market is still on penetrated in 2025 so.
There's enough white space for everybody and some market shares in what we focus on as much as his unit growth in our own growth.
And then to answer your question Jonathan about.
The shipments that were 139 shipped.
In the last quarter.
That shipments I think he was asking about installed totaled 244 events platform.
<unk>.
You gave them five number I don't have the install number handy, but it would be simply is that growth in units online for for for L. Five.
107 million units online growth for Oh, five yeah alright.
Thank you.
Your next question comes from the lineup, Chris Sakai fencing in agony oddly sake Lance now open.
Hi, good morning.
I got a I have a question on your your marketing spend.
You recently talked about your going to increase it going forward and I wanted to see.
Do you have.
Matrix day that.
Of your spend for new customer and how's that going to increase in the near term.
Marketing spin was artificially low during COVID-19.
For obvious reasons, where it didn't make sense to do marketing during that period of time really so marketing spend is coming back up we see it remaining relatively constant.
Percentage of revenue.
<unk>, so, but it will grow as the overall topline grows and as we look to 2022 as we mentioned we expect the mercury extend to grow during that year and as we.
One normalize it back to those levels, but secondly, as we invest in marketing and promoting.
<unk> G pump.
Yeah, and I would say great and then.
Four when would you expect L three sales.
To really pick up and and maybe.
Become higher than five sales.
We don't necessarily seem getting higher than five but they certainly have picked out and when you look at the relative percentages available free.
Versus Earl find if you go back.
Couple of years ago, but.
<unk> and now it's.
Over 80%. So so we see the ratio continue to to grow but.
We also expect helplines to be very strong going forward and particularly because you have the upgrade capability directly for mental five two.
Five G for example.
Oh did you want me to Cook dinner.
Yeah.
We do see all three sales.
Project that they will narrow without by sales over the four year plan, they don't quite reach that level of them. They all five of them.
Okay, great. Thanks.
Goodbye.
There are no further question at this time I'll tell you that we're back to volume.
Thank you Mika and thank you everyone for joining our third quarter Conference call. This calls now concluded and you may disconnect.
This concludes today's conference call. Thank you for participating.
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