Q1 2022 Gogo Inc Earnings Call
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Yeah.
Good day, and thank you for standing by.
Welcome to the Gogo, Inc. 's first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Mr Volume Davis, Vice President of Investor Relations. Sir. Please go ahead.
Thank you rinse and good morning, everyone welcome to Gogo as first quarter 2022 earnings conference call.
Joining me today to talk about our results are ugly Thorn, chairman and CEO and Barry Rowan Executive Vice President and CFO .
Before we get started I would like to take this opportunity to remind you that during the course of this call. We may make forward looking statements regarding future events and the future performance of the company.
We caution you to consider.
The risk factors that could cause actual results to differ materially from those in the forward looking statements on the conference call.
Those risk factors are described in our earnings release filed this morning and are more fully detailed under the risk factors in our annual report on Form 10-K, and 10-Q and other documents we filed with the FCC.
In addition, please note that the date of this conference call is may 5th.
2022.
Any forward looking statements that we make today are based on assumptions as of this date.
We undertake no obligation to update these statements.
As a result of more information or future events.
During the call we'll 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 in our first quarter earnings release.
This call is being broadcast on the Internet and available on the Investor Relations website, IR Dot Gogo are dot com.
The earnings press release is also available on the website.
After management comments, we'll host a Q&A session with the financial community only.
It is now my great pleasure to turn the call over to locally.
Thanks will.
And thank you all for joining us this morning.
The first quarter results, we announced today reflect our continued strong demand momentum as we execute on our strategy and.
And capitalize on the unprecedented demand for broadband connectivity solutions in business aviation.
I'll focus my remarks today on three buckets VA industry demand for connectivity Gogo strong first quarter results.
And our progress on two of <unk> key strategic initiatives.
Barry will then walk through the details of our quarterly performance and update our 2022 outlook right now.
Then we'll open up the call to your questions.
In the first quarter Douglas delivered record topline revenue of nearly $93 million up 26% year over year fueled by strong service and equipment revenue.
Our results demonstrate the demand for VA travel and connectivity continues to accelerate.
The three variables driving that demand our first they grow the growth over the last decade of the number of high net worth individuals who can afford to fly privately.
Second the Covid pandemic, which led many in that cohort to try private aviation.
And third the acceleration of the digital transformation brought on partly by Covid as demonstrated by growing usage of video intense social and work related applications like Tictac Zoom office 365 and alike.
These are all trends, we believe will continue.
In a recent survey 91% of business jet passengers said, they will fly privately either the same or more versus in 2022 versus 2021.
51% as I was saying they will actually fly more flights in 2022 and 2021.
We also believe the propensity of these flyers to demand in flight connectivity will continue to grow.
And partly by passenger demographic shifting to younger age groups.
Traditionally business aircraft passenger skewed more towards baby boomers are older.
In a recent Gogo brand survey, 67% of all respondents identified as members of gens X y and Z.
We've seen the impact of these trends play out and usage of data consumed by business aircraft on our network in Q1 grew 50% year over year and more than doubled over pre Covid Q1 2019.
We are also seeing these trends play out in rate plans is more than twice as many customers upgraded plants is downgraded plans in the quarter driving an 8% year over year increase in Gogo as first quarter ARPA.
And we've seen these trends play out in flight counts.
The flights across our entire fleet up 33% from Q1, 2021, and 29% from pre Covid Q1 2019.
What's more flights by corporate aircraft, which had lagged fractional and charter fleets and account for about 50% of our fleet.
<unk> in Q1 up 23% from Q1, 2019, and 47% from Q1 2021 signaling a strong comeback in demand from that very important segment.
This demand for travel is having huge repercussions in the business aviation industry.
Some fractional operators have suspended sales in order to meet their service commitments to owners used.
Used aircraft for sale are at an all time low at 2% of the U S fleet.
Many operators have turned to buying jets overseas and bringing them back to the U S to bolster supply.
Fortunately for us almost always those guests require installation and in flight connectivity system.
And order books at the Oems continue to grow on its recent earnings call Textron, a very significant partner for Gogo announced a $5 $1 billion absolute backlog up 53% from Q1 2021.
All of this activity is driving broader gogo adoption.
We ended this Q1 was 6526 atg units online and 11% increase over Q1, 2021, and we shipped 246, new advanced units in the quarter, which is seasonally usually a low quarter for us, but not this year that 246 units shipped number is.
Is the highest Q1 in our history.
64% higher than any prior Q1.
As you may recall.
We entered this year projecting 25% growth in advanced unit sales and on our last call indicated that we may be able to exceed that number if we could access enough supply to do so.
The good news is that our amazing supply chain team has managed to secure more supply and we're now raising our committed deliveries for the year to around <unk> hundred units.
Most 50% over the prior year with 95% of that demand number already spoken for.
Almost all units we ship are tied to a particular customer order from a dealer or OEM. So a very high percentage are installed and activated even in an economic downturn.
So this increase in unit shipment is a very good harbinger of future growth in high margin service revenue.
Despite the dire circumstances currently surrounding supply in the telecom industry, our supply chain our supply chain team has displayed tremendous great creativity deep knowledge of our products and deep knowledge of international logistics, they've leveraged our common componentry strategy and our strong balance sheet to work.
With our suppliers and our supplier suppliers and even our supplier supplier suppliers to get the thousands of individual components, we need to meet this tremendous surge in demand.
The efforts of our supply team chain team has not only allowed us to increase our committed deliveries.
Also build up buffer stock that allows us to meet drop in orders so that we never Miss an opportunity to install a plane.
<unk> also enabled us to pull in the Outdate uncommitted shipments from December to October again, helping ensure we did not ever missing installation opportunity on a plane.
As a result of this boost in supply.
Now able to raise our revenue guidance from a range of $380 million to $390 million up to a range of $390 million to $400 million.
I would note we continue to see signs of even further increased demand later in the year and we're working on supply to meet that demand.
This boost in equipment sales bodes well for our virtuous circle of growth strategy.
<unk> sales drive future high margin service revenue, which is the primary engine of our ongoing value creation.
Gross margin dollars from this service revenue in term provide capital that allows us to invest in leveraging the advanced platform to pursue adjacent markets and deliver higher bandwidth solutions, which in turn will drive equipment sales in high margin service plans and so.
So on and so forth.
On the earnings front.
Despite this being an investment year, we showed nice growth in Q1.
Delivering adjusted EBITDA of $42 $8 million, an increase of 26% over Q1 2021, driven by an increase in service revenue and gross profit.
<unk> came in better than we expected due to some timing related issues Barry will talk about later, but also due to higher average equipment selling prices than we anticipated and scale benefits in manufacturing as we ramp production.
At this point, we're not raising our adjusted EBITDA guidance range of $150 million to $160 million.
We now expect to be at the high end of that range and I would note that our new guidance includes an estimated $5 million of legal fees in Q3 related to our patent litigation with Smart Sky networks.
Now, let me turn to our strategic initiatives, which are aimed at deepening our competitive moat and driving long term shareholder value.
First enhancing our atg network to keep pace with customers on ground connectivity expectations.
And second driving adoption of our flexible future proof advanced platform in our existing customer base. Among the approximately 70% of the U S business aircraft that do not yet have connectivity and ultimately among the 14000 business aircraft outside the United States.
I'll start with enhancing our Atg network.
The first step in that and the successful execution of this objective is the commercial launch of our Gogo <unk> network in the second half of this year.
We remain on track on time and on budget.
We've now passed all development risk and are focused on five ship <unk> chipset tracking and building towers.
We had previously communicated that Gogo <unk> chipset supplier had delayed delivery of that critical components.
But they have now almost completed their production build and are on track to deliver that chipset in time for us to hit our current launch schedule.
On the tower front.
Had to manage through many supply chain challenges in southeast Asia, but also remain on track for our scheduled launch as of this morning. We completed 35 35 of the 150 tower sites, we're going to build and we're picking up the pace.
You can watch our progress on our map at our website www dot business that Gogo are dot com.
Later this summer once we have our chip and deploying most of our towers will begin end to end testing and fine tuning of the network.
From a regulatory standpoint, we're also on track.
Recently announced receipt of our parks manufacturing authorization from the FAA for our <unk> antenna, which enables us to begin installing that equipment on customers aircraft.
On the commercial side, we're continuing to take orders for five G and were making progress towards getting line fit with major Oems and we're extremely encouraged by the response from existing customers and dealers.
<unk> will be a huge advance for VA in flight connectivity as it will achieve average speeds are approximately 25 megabits per second with peaks up to 75% to 80 megabits per second faster than any IFC product available for business aviation today and at a lower cost than competing Geo satellite solutions.
<unk>.
<unk> will enable multiple streaming and video conference applications to be opened at the same time on the same aircraft.
And deliver a quality home or office like connectivity experience in flight.
That leads me to our second strategic objective driving advanced penetration.
Our advanced platform gives us opportunities to improve equipment stickiness introduce adjacent products and grow into adjacent markets and for those reasons growing the advanced installed base is quarter our strategy.
So far we've been very successful at this and reached an exciting milestone this quarter.
<unk> advanced system reached 1 million business aviation flight since launching in August 2017.
The most successful broadband product launch ever in business aviation with just over 2700 aircraft online as of the end of Q1 and is installed on more aircraft in our two biggest competitors combined.
Today.
I wanted to touch on just one very important feature of events, it's multi bearer capability, which gives gogo the ability to partner with a global Leo provider under a managed services model to build a global broadband offerings.
Gogo global broadband will allow us to first pursue the 14000 business aircraft outside North America.
Second pursue large north American jets that fly global missions and used Geo satellite connectivity outside the U S. Today.
And third drive stickiness in our core North American medium sized and smaller aircraft segments by offering a unique dual atg Leo solution.
That latter solution will aggregate, our atg capacity with the Leo networks satellite capacity in North American market, making our offering very competitive with offerings that rely on Leo capacity alone.
For customers that already have events.
The upgrade to add Leo would be simple it.
It would just install an esa antenna on top of the plane and run two wires inside one for data and one for power than they would have access to all the functionality advance offers including our fleet management and entertainment products, along with a Leo offering.
To pursue this tremendous opportunity Gogo with design and fund development of the airport in hardware required to access a Leo network.
And then partner with the Leo operator for network access.
We expect external development cost would be less than half the investment required for our Gogo <unk> network that that investment would be spread over approximately three years.
We also believe that our global broadband initiative of GBP, we call it will significantly accelerate our revenue and free cash flow. After we launch and would generate a very high return on capital relative to our other capital allocation priorities.
We are in active discussions with Leo and antenna partners and once we're ready to proceed we will provide more details on this very important project.
To wrap up these two key strategic initiatives Atg network enhancements and advanced penetration will dramatically improve the performance of our network for our customers.
<unk> adjacent product opportunities and provide new market opportunities all of which should build gogo as competitive advantage and shareholder value in the future.
Before turning it over to Barry I want to thank the entire gogo team for their exceptional work and dedication to Gogo and our continued success.
I also want to note that like so many across the world.
<unk> by the war in Ukraine, and deeply saddened for all those affected both in the region and beyond.
In particular I'd like to take a few moments.
Knowledge and share my deep appreciation and support.
So Ken Ukrainian software engineers, and <unk> worked for Gogo supporting our flight tracking and data pool tools. One of them has left us for the army.
Nine have continued to work almost every day since the war began.
Spite the destruction of brutality all around them.
Spire by their fortitude and sacrifice and will continue to support them and their extended families throughout this crisis.
Now I'll turn it over to Barry Thank you.
Thanks, Joe and good morning, everyone.
In my remarks today I'll start by walking through Gogo as first quarter financial performance in more detail.
Then I'll provide an update on our balance sheet and capital allocation strategy.
Finish up with some additional context around the updated 2022 guidance, we announced this morning.
During this quarter, we delivered record performance on multiple fronts record service revenue record total revenue record equipment backlog and record adjusted EBITDA.
These records are the result of continued solid execution by the Gogo team and a vibrant market.
Higher than expected equipment shipments led to high margin service revenue growth and increased profitability.
Total revenue of $92 $8 million in the first quarter grew 26% year over year.
This was the highest ever first quarter revenue for the company with strong trends in both service and equipment.
We achieved record service revenue of $77 million driven by an increase in atg units online of 11% year over year and 2% sequentially.
Our track record of continuing growth of Atg units online is evidence of the tremendous white space in a market that is only about 30% penetrated with Wi Fi connectivity.
Notably we continued to our strong trend of adding new customers with 61% of atg activations in the quarter coming from new customers.
As we have described penetration of our advanced products across our installed base and with new customers is the centerpiece of our strategy.
These equipment installations that drive increasing service revenue can provide the other significant customer benefits of the extensible advanced platform as highlighted.
In the first quarter events units online grew 42% year over year, 2000, and 699, an increase of 8% sequentially.
Our year over year advanced unit agreements has averaged about 45% over the past six quarters and we continue to expect advance to reach approximately 50% of our total atg units online by the end of 2022.
Importantly, as we grew our atg units online the Atg <unk> grew 8% year over year to $3321 demonstrating the increased utilization of our services we offer customers.
As Oak described strong growth in passenger data demand is driving upgrades to gogo as high rate data plans supporting our continued ARPA growth.
The launch of Gogo <unk> will further expand <unk> growth opportunities.
Now turning to equipment revenue Gogo delivered $22 $1 million in equipment revenue, a remarkable 52% increase year over year with high demand for our advanced <unk> III and <unk> products.
We shipped 246 events units in the first quarter, which was above our internal budget.
It was also a record for any first quarter in <unk> history.
As a reminder, equipment shipments are typically backend loaded during the year and tend to be strongest in the fourth quarter due to a combination of promotional activity and the seasonal dynamics of our customers.
As Oak mentioned, thanks to the outstanding work by our supply chain team, coupled with the ability to leverage our strong balance sheet to acquire inventory and capitalized on unprecedented industry demand for our products. We now expect total atg equipment shipments in 2022 to reach 3500 units.
This is up nearly 50% versus 2021 and is an increase from our budgeted growth of 25% that we communicated on our first quarter call.
95% of these 1300 chipsets are already secured and committed to.
Customers, which is the foundation for our confidence in the increased 2022 revenue guidance, we're providing today.
Turning now to profitability, we delivered strong service margins of 79% in the first quarter slightly above our budget driven by high operating leverage from a recurring revenue model.
Equipment margins were 35% in the first quarter, a one seven percentage point decrease sequentially.
We expect lower equipment margins of approximately 30% for the remainder of the year.
<unk> with our strategic objective of increasing events penetration.
Howard This is higher than originally anticipated due to an increase in the average selling price for equipment versus budget.
And the benefits of increased scale in our production operations with increased equipment revenue.
Our updated expectation for equipment revenue and margin is a key driver of our revised guidance expectations for 2022.
A rising record backlog also de risks our long term targets as more units installed drive growth of recurring high margin service revenue leading to stronger cash flow.
Moving now to operating expenses.
First quarter, combined engineering design and development sales and marketing and general administrative expenses decreased 10% sequentially to $25 $1 million.
This reduction was driven primarily by timing of expenses, including those related to <unk>, which I will discuss more in a moment as.
As well as lower general and administrative and sales and marketing expenses.
These factors were partially offset by increased stock based compensation.
In March of this year, we filed an 8-K to disclose our updated executives employee agreements the details of which will be filed with our 10-Q today.
These agreements will contribute to increased levels of noncash stock based compensation expense through 2022 as compared to 2021.
As we stated previously 2022 as an investment year, particularly as we ramp expenses for Gogo <unk>.
While the investment levels will fluctuate quarter to quarter spending for this strategically important project will drive increased operating expenses for the year.
We continue to expect our business models to reflect meaningful operating leverage over time, which is demonstrated by our long term target of adjusted EBITDA margin approaching 50% in 2026.
Now I'll provide some additional detail on our Gogo <unk> program and spending profile.
We remain on track to deploy our <unk> network in the second half of 2022 on time and on budget.
Our $5 1 million.
Of <unk> spend in the first quarter was lower than expected due to timing and was comprised of $3 million in opex and $4 $8 million in capex.
I wanted to be clear that while the recording of expenses is shifting quarter to quarter. The deployment schedule of our project and our overall cost expectations for <unk> are unchanged.
We expect our <unk> spend with a significant majority in capex to ramp meaningfully over the next several quarters as we complete our project and commercially launched our Google fiber network in the second half of this year.
To reiterate our expectations for Gogo strategy operating expenses in 2022, we have budgeted an increase of approximately $13 million versus 2021, which includes external development and deployment costs as well as additional <unk> related investments and marketing production operations and network costs.
Of course this spin Dampens Gogo is adjusted EBITDA growth rate for 2022 from what it would have been without this increased investment.
On the Capex side, we expect over 90% of our total <unk> investment to be completed by the end of 2022.
After Gogo <unk> is launched we forecast very attractive adjusted EBITDA to free cash flow conversion rates in 2023 and beyond driving our expectations of a significant ramp in free cash flow beginning in 2023.
Moving onto the bottom line <unk> adjusted EBITDA increased 26% year over year to $42 $8 million, primarily driven by a 19% increase in service revenue.
Gogo delivered net income of $22 2 million in the first quarter translating to <unk> 'twenty and basic earnings per share and 18 and diluted earnings per share.
We expect to incur a noncash income tax expense in future quarters as we did this quarter as we continue to generate positive pre tax income.
We also expect to see additional reversals proportions of our remaining valuation allowance within the next 12 to 18 months.
Importantly, based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period of time.
So we may pay a modest amount by the end of our planning horizon.
We expect net income in future quarters to reflect an increase in stock based compensation expense due to the executive employment agreements I mentioned earlier and the annual grants issued to all employees.
Incidentally, we believe our employee equity program as a meaningful contributor to our very high retention rates relative to peers.
This is especially important as we face a surge in customer demand in this constrained labor market.
Now turning to free cash flow, we generated $8 8 million and free cash flow during the quarter.
Our first quarter free cash flow declined from the prior year period due to a change in the timing of our interest payments following the refinancing last year.
As well as higher Capex and the use of net working capital was driven by a change in accounts receivable and increased inventory purchases due to increased demand.
On a sequential basis, this $8 8 million and free cash flow was down from $25 7 million in the fourth quarter of 2021, primarily due to $8 9 million in employee bonus payments made in the first quarter and the change in accounts receivable.
Despite 2022 being a heavy investment year, we are increasing our free cash flow guidance for 2022.
Now I will turn to a brief discussion of <unk> balance sheet.
Gogo is in a very strong liquidity position as we ended the quarter with $152 $8 million of cash on hand.
There are $100 million revolver remains undrawn.
As of the end of the first quarter, we had approximately $822 4 million in outstanding debt.
This includes the $719 $6 million term loan B and approximately $102 8 million in outstanding convertible notes, which are maturing on the 15th of this month unless earlier converted.
As we've discussed we will settle any conversion prior to maturity and stock.
Let me provide a quick reminder of the timing and impact of this process.
Given our current stock price relative to the $6 conversion price, we expect all holders of the remaining convertible notes to elect to convert.
Holders must notify gogo by May 12 to convert their notes.
This process is expected to add approximately 17 million shares which will bring us to a total of about 134 million shares outstanding.
The acquisition will reduce gogo is net leverage ratio to below four times based on adjusted EBITDA for the 12 months ended March 31 2020 to.
Putting us in the range of our targeted capital structure, which I will discuss in a moment.
The maturity of our convertible notes also further simplifies our capital structure.
After concluding this comprehensive refinancing plan, our interest expense will have been reduced by $78 million annually.
From a $111 million before our April 2021 refinancing to approximately $33 million going forward.
This $33 million excludes the impact of changes in LIBOR rates inflows from our hedging contract and potential voluntary debt payments.
As a result of a remarkable operational and financial progress.
<unk> balance sheet is now a competitive strength.
It provides significant strategic and financial flexibility as evidenced by the actions we've been able to take to manage our supply chain.
And will help propel the long term growth of our bottom line.
As we've shared on previous calls we are pursuing a balanced capital allocation strategy focused on four primary actions in the following order of priority.
The first priority is launching <unk> in the second half this year on time and on budget.
The second priority is reducing our financial leverage.
On this point, we stated on our last call that our balance sheet objectives, including target included targeting a net leverage ratio of less than four times, while maintaining minimum available liquidity of $125 million.
With the majority of <unk> cash, but also considering our revolver capacity.
As I mentioned, a moment ago, we expect to achieve our targeted leverage ratio during the second quarter.
The third prong of our capital allocation strategy is to make strategic value, creating investments in our business, including the Leo based global broadband opportunity were evaluating in which oak discussed in some detail.
And finally, our fourth priority is returning capital to shareholders.
As you can see we are progressing well through the first three of these priorities.
We will continue to assess returning capital to shareholders in the right way and at the right time.
Let me add one final housekeeping point to this discussion of our capital structure related to the shelf registration statement that Gogo filed this morning.
I noted last quarter that when GTC are exchanged convertible notes for common stock in April of 2021 have received customary demand and piggyback registration rates.
This shelf was filed pursuant to that registration rights agreement.
The Thorn family and certain members of our board have also registered shares under the shelf pursuant to piggyback registration rights issued back in 2019.
Now I will turn to our increased 2022 full year financial guidance that we announced this morning.
We now expect to ship approximately 1300 atg equipment units in 2022 up nearly 50% from 2021 and a meaningful improvement from our prior guidance for shipments of approximately 100.
Gogo now expects to deliver full year 2022 revenue in the range of $390 to $400 million compared to our previous guidance range of $380 to $395 million.
We also expect to achieve full year adjusted EBITDA at the high end of our previously announced $150 million to $160 million range.
Selecting the planned increase in our <unk> investment this year and also factoring in $5 million for estimated legal expenses related to the smart Sky patent litigation.
In addition to raising our guidance for both revenue and adjusted EBITDA. We raised the low end of our previously guided range for free cash flow in 2022 by $10 million.
And now expect it to be in the range of $35 million to $45 million.
Our free cash flow expectations reflect capital expenditures of approximately $65 million with approximately $50 million of the capex spend tied to Gogo <unk>.
Our five year targets remain unchanged.
As a reminder, the 2022 guidance and long term targets are derived from our baseline 2022 forecast and long term plan.
Which include planned investments and Gogo, if I G G. But do not include potential strategic investments currently under consideration, including the global broadband initiatives.
As our outlook demonstrates our momentum is building, which we believe positions us for an even brighter future.
Stemming from a strong tailwind in the attractive business, even aviation industry, our leading market position, our quality product and service platform and the strength of our balance sheet.
Before we open up the call to questions ill, just echo Oaks heartfelt, thanks to the entire Gogo team Yuri.
Relentless dedication and hard work inspire us as you continue to deliver industry, leading service and impactful innovation for our customers and value for our shareholders. Thank you.
Operator. This concludes our prepared remarks, and we're now ready for our first question.
Thank you Sir.
At this time I would like to take any questions you might have for US today. As a reminder, if you would like to ask a question over the phone simply press star one on your telephone keypad.
Again that would be star one on your telephone keypad.
We have our first question from the line of lines.
<unk> <unk> with Cowen Your line is now open.
Hi, Thanks, guys. Thanks for taking my questions and congratulations on the great quarter.
I wanted to begin I guess on the unit shipments of air to ground unit shipments 300 for the full year.
If I am looking at the press release, it looks like that suggests pretty substantial acceleration from the pace in Q1.
And I'm just wondering.
Ahead of the number that we had been modeling what could you talk a little bit about what gives you. The confidence that you can get to that 1300 number I mean, how much of that is sort of contractually in backlog how much of that is just sort of your sense on where the business is going and then I have one follow up question if I could.
Yes.
Yes.
The real governor on our unit shipments this year as supply not demand the demand is tremendous.
So the real confidence comes now in that.
<unk> componentry, we need to hit that 300 number.
And that is all well and well in place and in hand.
On the demand side, 95% of those of that number is got a name on it in terms of where it's going and what it's being installed and so you know.
Alright.
We're almost already sold out of the increased 200 units that put it that way.
And frankly, I think we see signals that there could be a lot more demand later in the year than even in the <unk> hundred numbers. So we're seeing now are working hard now to see if we can secure more supply.
Okay. Thanks, and then my follow up is really actually on the Leo Global broadband strategy, there's been an increasing amount of.
<unk> on these earnings calls around this so it certainly feels like things are happening more quickly than perhaps we had expected.
Is that is that the case or is this still something that you see potentially rolling out.
I guess what is the timeframe that we should be thinking about in terms of making an announcement of finding partners and then also more importantly.
When do you think you could be someday in service with the global broadband product is that still sort of towards the end of the decade or is that the middle of the decade, how do we think about that thanks.
Yes.
Active conversations with potential partners as I said in my <unk>.
Comments and.
We will provide more detail when we have those partnerships nailed down and we're ready to talk about our plans.
I would in terms of timing.
You know it will take.
Probably 10 years or cellular developed and the equipment that we'll be putting on the aircraft.
And so that's sort of one critical path and then the other critical path part of the critical path is the Leo networks actually being completed.
And service. So that's also probably about two years, so I'd use that.
That in.
Thank you for your mind as to being when the earliest we could have a product out and we're going to move as quickly as we can we view this is very important.
A competitive response to potential.
Other Leo providers trying to come into our market or other people partnering with your market coming in and we we don't want to be a lag of at that we'd like to being a leader.
And.
And frankly, you know these constellations are still in progress in terms of being launched so.
The governing factor as well.
So I would say mid decade on we expect these to accelerate our growth both on the topline and bottom line.
<unk>.
But most of the financial benefit of that will be from 25.
Plenty of 25 or 26 25 ish.
So really just to sort of the current long term plan is kind of wrapping up okay. Great. Thanks again for taking the questions I'll share at the time.
Yes.
Thanks Lance.
Thank you. Our next question is from the line of Landon Park with Morgan Stanley .
Please go ahead.
Great. Thank you and good morning, everyone.
Just following up on the backlog question I'm wondering if you can provide any more details in terms of.
What type of <unk>.
Free versus Ohio, I mean, what type of types of aircrafts.
We're seeing the demand come through from in terms of aircraft size and stuff like that and then just a second question could you touch on the FCC funding that you applied for earlier this year.
And how youre thinking about.
The potential.
To receive significant pumps.
Yes, sure I know in terms of the $3 five mix I don't have that at my fingertips.
L three has.
Growing as a percentage of our AD sales this year, but.
David to bear in a moment, maybe he'll provide the L. Three O five breakdown in terms of the aircrafts sides, we're having.
We're seeing growth in all segments as you know we've had.
With considerable success getting down into the general aviation market.
Year with tariffs and we have a lot of activity in that space and then across the light medium and large shifts we've seen growth in every segment. So.
There has been an overall skew there in terms of the FCC.
Government.
Subsidies are designed to get you to do things.
That you wouldn't.
View is economically viable.
On your own and we.
We would be removing those ETE equipment over a much longer timeframe, if it werent for the availability of a subsidy like this.
Depending on what we receive will decide whether its enough to alter our behavior or not.
And if it if it is.
We'll accelerate the removal, which is what the government wants us to do.
So I'm going to leave it at that for now we'll see what happens.
We see announcements you have led decisions and.
In June on this there's a lot more demand for these dollars than they anticipated so very hard to tell right now exactly where all of that will land.
And Linda just to provide some specificity on your question around the backlog.
In General terms, we expect the split between <unk> and <unk> to be about 50 50.
All of 2022 with a perhaps a slight skew to a little bit more.
But think about it in terms of roughly 50 50.
And should we still be expecting overall equipment margin to compress year over year.
Or.
Yes.
As I mentioned, we do expect equipment margin to be in the 30% range for the balance of this year that is higher than we had previously expected as we're seeing that we do as the average selling prices are coming down and we're not required to do as much discounting as we projected but as I mentioned this is very much in line.
They are.
Strategy to drive advanced penetration. So we're we're happy to see those equipment margins, even at that level, which of course is still additive to our unit economics, but really gets the advance penetration.
Needed installations up there.
Great. Thanks, Barry.
Thank you. Our next question is from the line of Ric Prentiss with Raymond James Your line is open.
Thanks, everybody.
Couple of follow on questions I appreciate the time today, a follow up on where we land.
His question is obviously I appreciate the color on the AD Leo program possibility.
Luke you mentioned extremely developed could be about half to five G investment help us remind us about what that total <unk> investment is just so we can get a ballpark of what the half the <unk> investment would be and when it says externally developed.
Would you imagine your costs as far as splitting it roughly between opex versus capex.
Yes.
We've always said that <unk> external cost would be about $100 million.
Sorry can correct me, if I got that wrong, but I believe about $100 million. So I think that's the.
So as a guidepost you can use.
And then externally.
Both cost of equipment.
R&D and other things so.
That's what we're guiding to here the rest of it is frankly, just baked into our internal costs are already baked into our guidance. It's just using our resources that are already in.
Opex and Capex for the guidance, we provided in the past for the five year plan.
And Rick a little more color on the split as you know.
<unk> is substantially weighted to capex on the order of two thirds of that $100 million is capex.
For the global broadband product being less than half of that total $100 million number the lion's share of that will be in opex. So it's going to be a much more.
Development centered project, we don't have to deploy towers and those kinds of things obviously so so.
The capex spend is much lower.
Yeah. So, it's obviously more opex trigger, but you're only spending half that level.
When you think about potential partners on the <unk> side in the antenna side I know you don't want to get into specifics, but how do you. What do you consider important success factors as far as picking partners.
A lot of Leo constellations out there some launch not launch, but what do you think are the important factors as you consider partners as far as what they would bring to the table.
Yeah, well obviously.
And in terms of the leos that would be the probability of them being launched as a very important one so that's.
That's foremost in our minds on that.
Yes.
In terms of the.
There are lots of our partners I, probably don't want to get into that in too much detail, but obviously, we're looking for people that have the expertise to what build.
Build what we want them to build to our design and the timeframe that we want it delivered.
Okay.
And then just one kind of housekeeping one you both mentioned the litigation fees I think it's $5 million. This year do you include that in your Eva EBITDA any thoughts.
Other than just calling out like excluding I know, there's some accounting rules out there but.
I think some other firms would pull that out hopefully when they report.
Well I did ask the question Rick but.
Yes.
We came to the conclusion that.
We've had.
Legal fees associated with litigation in the past.
We've had.
The shareholder lawsuit we've had various patent lawsuit can we'd never pulled that out in the past of EBITDA. So we thought that putting it out now would be inconsistent with that and that that inconsistency was inappropriate.
Right.
We did want to provide the number though Rick because certainly as you look at this.
You can pull that number out from the recurring EBITDA number obviously, so we thought it helpful for the street to be able to know what that number was.
And a final one for me appreciate the time.
Obviously inflation is in the news as you think about interest rates affect all new members and labor cost inflation costs, how should we think about how the current financial markets are affecting your operations and your <unk>.
To do going forward.
Alright, why don't you take that.
A question on our operations and then I can talk about the market a little bit.
Yes.
The inflation, Rick we kind of think about it.
In three parts. It is built into our forecast by the way and planned for in our guidance, but the first is for.
Increases in wages and we have budgeted for larger increases in the past than in the past based on what we're seeing.
Overall, the second pieces on component cost increases, we do have long term contracted purchase orders that lock in future pricing and materials. So.
Component costs in aggregate will gradually.
<unk> gradually over time, we do see some some increases on a component by component basis, but we'd expect that to increase over time and importantly, the cost of equipment is only about 20% of our total opex spend so we are less vulnerable there.
And then the third area is related to our cost of service and we actually see a meaningful portion of that cost structure like backhaul not subject to inflation factor overall atg cost per megabyte in unit terms are expected to stay flat or decline over the five year planning horizon. So so we feel like we have comprehended insulation.
Into our forecast, but it's something we monitor very carefully.
Yeah, and then taking that step further.
Thinking about a potential recession.
And high.
High interest rates and all of that and how that could affect our market. It's interesting when you look at the market.
We performed very well through.
<unk> nine financial recession in two.
And through Covid, obviously and.
Oh wait.
Nine.
Business aviation industry went through a huge downdraft.
Went from over 1000 aircraft deliveries a year to 500 and it stayed very low for a number of years, but our demand.
Sort of Kimberly unaffected and we continued to sell very well through that period.
My question was launched right before that period, so it was a pretty new market, but.
We were able to drive significant service revenue growth through that period and then in Covid.
We did have a downturn in equipment orders in the second quarter of 'twenty.
For the year I mean, our service revenue was only down 4%, so pretty resilient in that in that reception as well so.
Look forward.
When we think about the impact of a recession, we could see a slowdown.
What a red hot equipment sales at this point, but we see none of that so far.
We would expect our service revenue to be largely unaffected by it.
And I think past history, so fair setup.
Great I appreciate that thanks, guys stay well.
Thanks Kurt.
Thank you. Our next question is from the line of Scott <unk>.
<unk> with Roth capital Your line is open hey.
Good morning, Thanks for taking my questions.
Barry great job on the quarter, particularly on the operational front.
Thanks Scott.
It's probably premature but given your visibility to 2022 at this point, we will exit the year, it's still less than a third penetrated into the market what are the early thoughts for 2023.
The initial expectation that we see another 1300 atg units going out the doors or some moderation on that front how are you thinking about it.
Yeah, well I think.
We will update 2003.
In the second quarter call, probably we haven't really flowed all that through.
And our long term model as it stands now.
What is it we have about.
11% unit growth each year is that what's projected in there.
Okay.
Yes.
15% growth that's right.
Yes, the aircraft online or in that 11% 11, 12% range and the balance from an increase in ARPA.
Okay, all right. So that's what that's what's baked in there so far we.
We are taking orders already for 23.
And so we have a pretty sizable chunk of orders actually going out into 'twenty three so so far the harbinger of good.
Of course, we expect to have a pretty big lift in service revenue from the increased units, we're selling this year, which would be above.
What we projected in our long term model, so well more on that like I said in.
In the second quarter call. After we've done our re forecast for 'twenty.
Very good and if I could maybe be looking at <unk>, it's nice to see that everything remains on track from a technology development network standpoint for a second half launch I'm wondering if you could give us some insight into the interest level of <unk> and what you think the penetration adoption upgrade cycle would be and give us some color in terms of <unk>.
Cost per upgrade with existing advanced systems and timing.
For aircraft to be upgraded and I guess as part of that you've been talking about a 4% to 5% I think <unk> increase over the next several years, yes, we've been running at 80% I think the last couple of quarters and that's even pre <unk>. So how does <unk> impact it <unk> SKU as well thanks.
Yeah.
Yes, the way, we think about <unk> is that.
Okay.
We expect to start some meaningful shipments in 2023 with the announcement by the end of this year. It is a relatively slow ramp as people upgrade.
Over time, so it's going to ramp during the planning horizon and just to give you some context Scott.
The advanced product line was the most successful launch in and business connectivity aviation history really is at about 25%.
After four years or so so that was the fastest ramp so you wouldn't necessarily see it quite that fast, but so it will take some time to build.
But importantly, it also drives the RP so we.
We have been.
Uniquely higher <unk> expectations for <unk>, and Thats, whats, partly driving that lift and <unk> expectations I would say that towards the first.
The orders that we're seeing from <unk> that that is an affirmation of the.
Customers' interest and pay more proprietary because of the performance is expected to deliver so so the early signs are positive relative to what we have put in the model.
Thanks, so much.
Thank you.
Thank you. Our next question is from the line of Louie Dipalma with William Blair. Please go ahead.
Okay.
Barry and well good morning.
Hello, how are you doing good morning.
Yes.
Barry Congratulations on your eventual retirement.
Sure.
Thank you Larry.
And yet and it's going to be in great hands with Jesse So do you still have to put up with me for a while.
Indeed.
I have a question it seems that the.
Extinguishment of the convertible debt is eminent so what share count should.
Analysts using for Gogo.
So it'll be about 134 million shares after those 17 million shares convert.
Sounds good.
And in terms of capital allocation you discuss leverage.
Or is that as the stock buyback and or a potential dividend are those still being <unk>.
Considered after you reach your your leverage target.
Yes.
Very systematic could we think quite disciplined about the way, we're approaching capital allocation and as we've said for a number of quarters now where we think about this in a sequential priorities of getting kind of gijon and getting the leverage where it needs to be.
Vesting in ways that can enhance the value of the business like with Gogo.
Mobile broadband and then returning capital to shareholders. So so we have made very good progress in the first three of those <unk> on track still to be finished obviously, but on time and on budget financial leverage will come below that four times. This quarter and then as oak described in some detail.
Sure.
Very seriously evaluating this global broadband investment.
Of which takes the level of investment that we described.
So we are.
Actively pursuing capitals.
An analysis of returning capital to shareholders, but it's in that context. So as we look out to the capital generation capability of the business certainly is there over the over the next several years. So it's something that we'll be we'll be mindful of and know that it's an important factor for the shareholders.
Great and final one for for <unk>.
How fast is the <unk> network and initial trials with the 35 cell sites that have been completed and done.
Carrier aggregation slash channel bonding works that combine the 850 megahertz signal with the I think the two four gigahertz signal and and with that.
Backdrop.
Is like.
A broad band product even necessary over.
Continental U S.
<unk> network works is after tax.
Yeah.
Yes.
Well I guess first of all.
We think it's a strategic imperative to continue continuously improve the quality of their networks to remain competitive so the idea that you could add.
Aggregate <unk>.
G with Leo and the same.
And the same router and distribute it through the aircraft.
We think it's a great positive about GDP and solidifying.
Our customer base in the U S and continuing to grow it and makes it extremely competitive in the U S market with any potential Leo provider coming in and trying to compete with us. So.
That is a very important.
In terms of the rest of your question I mean.
You have to recognize that.
Well in terms of our testing.
With one tower, we could see that the $8 50, and two that forward. So that's been.
That's been.
Verified and that's not an issue on those other towers, they havent been lit up yet so well knowhow.
Will that get tested.
<unk> tested a little bit later.
Good and you just mentioned duly using potential Leo product with your Atg network would that require substantially more like hardware on the plane.
No no.
Built into our vast I mean, the benefit of advances it's got a very unique multi bearer capabilities barrels being network. So we can handle multiple networks going into the same box and then being blended into one user experience as opposed to today, where you might have two networks atg and satellite but you have.
One on the other ones not turned on.
But the.
Gogo multi bear in advance both can be turned on in both you can essentially add the capacity of the two of them and that's the capacity to the aircraft. So if we're delivering.
50, Megabits per second with Atg and another 100 Megabits per second for the layout product is the 150, Meg 150, megabits per second coming to the aircraft.
Alright, so it would be.
Be additive.
Thank you.
And thanks.
Thanks to everybody.
Thanks, Eric.
Thank you. Our last question comes from line of Anthony Klarman with Deutsche Bank. Your line is open.
Thanks, really just two follow ups first on the on the potential for the global.
Leo broadband partnership.
Just to just to sanity check that I guess I'm, assuming that there's no spend on a potential partnership agreement like that that's included in our long term financial targets. So theoretically.
To the extent you were to sign an agreement that commercialize at some point during the planning horizon, there might be some incremental spend associated with that but then theoretically I guess there is also no inclusion of revenue from that in the 15% CAGR that you put out for 'twenty one through 'twenty six.
Yeah right, Yes first of all yes, there is.
Global broadband is not in our baseline numbers that are the foundation of the long term guidance we've given.
What we call an overlay so we'll share more detail on that overlay.
If and when we announced the project.
So that's number one.
Number two the fact.
The business model, where the Leo providers of managed service model. So.
We would be paying by the drink essentially for usage, so theres no real cost there.
Prior to having revenue to pay for it.
Got it I guess I was thinking more along the R&D and equipment.
Or CPE lines, but I guess, even that is more of a back ended.
The constellation is launched and ready to go type investment.
No no that's yes.
We're going to be creating and developing side the equipment that goes on the aircraft, which is essentially an esa electronically terrible antenna and a couple of wires that run down into the aircraft.
The advanced pockets in new aircrafts. So there's there's not a whole lot of new equipment to develop other than that.
But that's something we will fund and that would happen in advance of going revenue, yes that would be the initial investment that I talked about over three years.
Understood. That's clear so if I think about the free cash flow guidance in the long term targets, which you have it.
125% and 23.
Getting to over $200 million by 'twenty five essentially that's all coming from underlying base business EBITDA growth essentially capex is relatively flattish once you get past <unk>. So really all of that increment is coming from the base business.
And growing EBITDA over that two year period.
Yeah, that's right that's absolutely right.
We think that could be.
A little transparent that the service revenue.
We'll be more than in that guidance and so that will help that will help our free cash flow.
We may have a little bit of slippage of some <unk> spend into next year that might hurt free cash flow that was just the timing of invoices.
But so we'll see how that all shakes out I mean, the investment in our global broadband product would be obviously negative free cash flow, but it may not be it may not we don't know if it's going to change that guidance or not yes. It will let you know.
When we're done with the 23 of adjusted.
Understood and then Barry on the on the adjusted EBITA with the litigation expense.
Just to check to make sure I understand that what you were saying in response to another question I think in the 10-K, you had not yet reserved anything against smart Sky. So is this an actual accrual against future potential litigation expense or is it actual cash expense that you expect.
To go out the door I guess youre using the term more of expense and then an accrual. So I just wanted to check whether it was cash or an accrual against a future potential outcome.
Yes, the way, we think about that entity is that that's the amount that we have earmarked two defenders.
Through the preliminary injunction period. So so that is net of the EBITDA. So the way to think about that is that EBITDA range of $1 50 to 160, and now were saying will come in at the high end of that range and that is accommodating that $5 million expected spend in the high end of the range guidance.
Yeah understood, but I think Youre also answering my question of it is actual cash expense because it's it's including the cost of defense and the suite in and some of the other cash expenses as opposed to an accrual for a potential future liability.
Yes once.
We get once we proceed through the suit this represents the cash outflow for defending ourselves and thats. It.
Understood. Thank you very much yeah. It does thank you.
Yeah.
Thank you we don't have any further questions at this time presenters. Please continue.
Oh.
Thank you everyone for joining our first quarter earnings call and we will look forward to speaking with you next quarter. Thank you.
Thank you also okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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