Q2 2022 Gogo Inc Earnings Call
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, and thank you for standing by and welcome to the second quarter 2020 to Gogo, Inc Earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's 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.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today will Davis head of Investor Relations. Please go ahead.
Thank you Crystal and good morning, everyone welcome to Gogo second quarter 2022 earnings Conference call.
Joining me today to talk about our results are hopefully thorn chairman and CEO .
Barry Rowan Executive Vice President and CFO .
Also listening in on the call is Jesse Benjamin <unk>.
And your vice President of Finance and Chief Accounting Officer.
Jesse will assume the role of Gogo CFO in early 2023.
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.
More fully detailed.
Under the risk factors in our annual report on Form 10-K, and 10-Q and other documents we have filed with the SEC.
In addition, please note.
The date of this conference call is August 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 will present, both GAAP and non-GAAP financial measures.
We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our second quarter earnings release.
This call is being broadcast on the Internet and available on the Investor Relations website at 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 ugly.
Thanks will.
Thank you all for joining us this morning to discuss <unk> record breaking second quarter results.
Since our last call the macro trends around inflation and interest rates have created a major challenge.
Major challenging economic environment for many companies.
The companies with clear competitive advantages and recurring revenue streams to drive robust cash flow are well positioned to deliver for shareholders. Even in these turbulent times.
And after the transition we've gone through the last few years.
Gogo is now one of those kinds of companies.
As I'll discuss in detail today, the fundamental trends driving business aviation connectivity are still intact.
Resulting in continued strong demand for gogo as equipment and service.
Gogo also benefits from a business model that mute the impact of inflation, which Barry will discuss in a few minutes.
We're the leader in D. A I N C today and the innovative products, we bring to market like our advanced platform and our <unk> network truly differentiate gogo and Derisk, our strong cash flows for years to come.
And we're putting our strong balance sheet to work toward additional innovation, such as our recently announced low Earth orbit satellite global broadband product or G. B b. It will give advance customers an easy upgrade path to even more enhanced capacity and expand our addressable market outside of North America.
Combined these capabilities with the fact that we're able to still generate strong cash flow.
Even a network upgrade cycles like five G.
And combine that with Doug a huge market opportunity 30000 out of the roughly 40000 business aircraft around the globe today still have no connectivity.
And we feel Gogo represents a very attractive investment opportunity.
I'll focus my remarks today on two main buckets first trends in the business aviation industry that drive demand for connectivity and drugs Gogo strong second quarter results.
And second our progress in two of those key strategic initiatives.
Launch of our <unk> network and the global broadband project.
Barry will then walk through the details of our quarterly financial performance and update our 2022 and long term outlook before we open the call up to your questions.
So let's start with demand for connectivity in VA and Gogo strong quarter.
We delivered record revenue of nearly $98 million up 19% year over year fueled by strong service and equipment revenue.
Our results demonstrate the demand for B, a traveling connectivity remains very strong.
Gogo is backlog made up of dealer purchase orders and OEM commitments reached record levels in Q2, and now covers our full year 2022 revenue projections and stretches well into 2023.
This is one quarter ahead of our usual pattern of next year orders starting to flow in Q3 and Q4.
An early look at 2023, including new sales and upgrades from plastics to advance suggests it will grow as shipments by more than 15% over the 1300, we've raised guidance to this year as.
As a result, we expect 2023 revenue growth to be above the 15% CAGR in our long term model that we guided to earlier this year.
Also importantly, these increased equipment shipments translate into recurring revenue, which sets us up well to accelerate free cash flow growth from 2023 and beyond.
This long term demand is driven by a number of factors.
The younger profile today's be a passenger has resulted in reliable and robust in flight connectivity, becoming table Stakes.
Passengers demand the ability to work video conference email and connect on social media in the Sky the same way they do in their home office.
That demand was once again reflected in our Q2 results as data usage by Gogo customers across our networks was up 33% over prior year and usage per flight hour up 11%.
We also saw about twice as many customers upgrading plans as downgrading plants contributing to our ARPA growth.
Additionally, bee.
A flight counts that general bellwether for VA demand remain at all time highs.
Charter in fractional jet flight count sort during the pandemic, but in the last several months. We've finally seen corporate jets, which represent about 60% of Gogo sleep come back to life with flight Count's up 27% for the quarter and data usage up a whopping 81% of our pre pandemic Q2 2019 levels.
To that point the demand for travel is having a ripple effects across the industry.
Used aircraft for sale are at almost all time low at two 6% of the U S fleet.
And many operators are now buying jets overseas to bolster supply, which is good for gogo because they often required in flight connectivity installations.
And order books at the Oems remained strong four out of five publicly traded Oems reported Q1 book to Bill ratios are better than two times greater than two times or better.
Meaning that for every jet they delivered their chew on or what.
Since 2009, only one of them.
Previously ever reported a book to Bill ratio above two and that was in 2021, which was already part of the recovery.
All of this activity is driving broader gogo adoption.
We shipped a record 310 units in Q2 and finished the quarter with 6654 Atg units online a 10% increase over Q2 2021.
We've booked and secured supply to ship 1300 unit this year.
45% more than last year, and we expect advance to account for almost 50% of our installed base by year end.
The good news is that with our strong supply chain management strong balance sheet and common componentry strategy, we secured the supply we need to deliver on our fiscal year 2020 to expectations and we're confident in our ability to secure supply to meet our 2023 projections.
As a result of our continued progress and strong performance.
Now expect to deliver full year 2022 revenue at the high end of the 390 million to $400 million guidance range that we raised last quarter.
As we look ahead, we believe we can continue to grow our topline for the following reasons.
First roughly 16000 business aircraft in North America have no connectivity today, and our addressable with our current Atg network and best in class Advanced platform technology and second there are roughly 13000 business aircraft outside the U S that don't even have access to connectivity today and that will be addressable.
With our global broadband initiatives.
On the earnings front, despite 2022 being an investment year, we continued to deliver growth with Q2, adjusted EBITDA up 12% year over year to $41 2 million.
And we expect to finish the year at the high end of our 150 million to 160 million guidance range.
As Barry will discuss we're maintaining that expectation despite $9 million in fiscal year 2022 expenses that were not included in our original fiscal year 'twenty two guidance.
Namely our global broadband initiative, which was an overlay at that point.
And legal fees in connection with our Smart got Smart Sky litigation and increased interest rates.
As we look forward to 2020 three our business is firing in all cylinders and we're excited about GBP and our strong order book.
Now, let me turn to our strategic initiatives.
Gogo strategy is focused on deepening our competitive moat and driving long term shareholder value by creating easy upgrade path for our customers as technology digital infrastructure and customer preferences evolve.
That starts with enhancing our atg network and lots of <unk> and the launch of Gogo five G, which will improve average performance five X 10 X of our Gogo as current Atg networks with takes a three times those numbers.
And the commercial side.
We're extremely encouraged by the response from our market.
We're taking orders for five G from end customers, making progress towards getting line fit with major Oems and pre provisioning dummy aircraft now with our five antennas and harnesses. So operators can install the five G box quickly once the network is available.
It's great to see this level of traction with a product that isn't even on the market yet and demonstrates how much VA market Trust gogo to deliver.
We've passed many significant milestones.
FAA certification of our site G box, which combined with prior approvals for advance out five box and our multi band five antennas means we now have received all required approvals for our five G airborne hardware.
As of this morning, we've completed construction of 95 towers nearly two thirds of the 150 towers needed for us to offer a complete nationwide coverage and we have clear line of sight to the equipment and resources required to finish the remaining 55 sites.
One recent unfortunate develops.
The manufacturer of our <unk> chip has just notified us of a new issue in late stage testing, which could delay ramping up to full production volumes until mid 2023.
This wrinkle has been factored into the 15% unit growth projection I shared a moment ago.
We believe the impact of this delay will be muted because customers that want five G can pre provision and by R. L. Five and envy 13, five G antennas today and operate on our <unk> network, while they wait for the five G box next year.
This shift will.
Also delay some <unk> expenses from 'twenty to 'twenty, two to 'twenty, 'twenty, three which Barry will cover in a moment.
Our second key strategic initiative is driving advanced penetration and leveraging the platform capabilities of advance to strengthen our competitive position provide an easy upgrade path for customers and allow us to serve new markets.
Six years ago, when we designed the Vance, we designed it with multi bearer capability anticipating that evolving satellite technology with support Gogo is expansion to the rest of the world market over the long term.
Our global broadband initiative is the realization of this long anticipated next chapter for IFC and for Gogo.
As we announced in May we've partnered with Hughes network systems to develop a small electronically steered antenna Esa to access access the one web low Earth orbit Leo.
Like constellation and expect to deliver the first reliable Leo global broadband service to the global business aviation market.
Gogo is exclusive antenna assembly will be small enough to fit on virtually all sizes of business aircraft from Super light Jets, and large turbo props to ultra long range heavy jets.
We're also very excited about partnering with one web.
They've launched 428 out of 648 satellites.
We are ahead of other Leo constellations in achieving global coverage, which we expect will enable us to be first to market with a reliable products.
Their Gen. One network will deliver a significant boost in speed over our five G product and is fully funded.
And with their proposed merger with euros that they should be in a good position to fund their gen. Two network, which will deliver an even bigger boost in speed, thereby giving gogo advanced customers are very easy path to an order of magnitude improvement over the speeds B a passenger's experience today.
Once launched.
Gogo global broadband or GBP as we call. It will allow us to first pursue the 14000 business aircraft outside North America, the huge increase in our Tam.
Second pursue large north American jet that fly global missions that today use gogo atg in the U S by Geo satellite connectivity outside the U S.
And third drive enhanced stickiness in our North American customer base by offering an easy upgrade to <unk> and a unique dual atg and Leo solution that combines the capacity of both networks.
For customers that already have events the upgrade the GBP will seek but will be simple.
Just install in a S antenna on top of the plane and run two cables inside one for data and one for power.
GDP is projected to significantly accelerate our revenue and free cash flow growth from its launch through the second half of the decade, and Barry will give more details on the financials and long term targets in his remarks.
Finally, what's most exciting about GBP as the overwhelmingly positive responses received from customers dealers and Oems.
It's really encouraging to see this level of interest and further proof that our strategy is working.
To wrap up I want to thank my Gogo teammates we've completed an extraordinary turnaround in the last two years, we're working hard we're innovating, we're beating expectations and delivering a major strategic projects at set gogo up to exceed our customers' expectations and drive long term value for shareholders and with that I'll turn it off.
Over to Barry.
Thanks, Al and good morning, everyone.
In my remarks today I'll start by walking through Gogo second quarter financial performance.
I'll provide an update on our capital allocation priorities and finally I'll finish up with some additional context around our updated 2022 financial guidance and long term targets, which now reflect our expectations for our global broadband initiatives.
During the second quarter, we achieved several record highs, including total revenue service revenue and advanced unit shipments.
For the second quarter, a record total revenue of $97 $8 million grew 19% year over year.
Our topline was driven by record service revenue of $73 1 million as Atg units online grew 10% year over year and 2% sequentially.
Notably we continued to expand our reach in the market with 63% of Atg activations in the quarter coming from new customers.
As we've discussed previously just over 30% of North American business aircrafts have in flight connectivity. So theres plenty of open space in the market to support our future growth expectations.
As Ive described increasing penetration of events and leveraging its flat platform capabilities.
<unk> the centerpiece of our strategy.
Both in the North American market, where we operate today and globally as we implement our GBP initiative in the future.
In the second quarter events units online grew 40% year over year to 2893, an increase of 7% sequentially.
We continue to expect advance to reach approximately 50% of our total atg units online by the end of 2022.
As we grow our atg units online our atg <unk> grew 1% year over year to $3328.
As a reminder, atg ARPA in the second quarter of 2021 benefited from the recognition of $1 $8 million in deferred revenue related to a customer contract.
Excluding the impact of this deferred revenue our second quarter 2022, or two increased 4% year over year, demonstrating the increased utilization of our services by our customers.
Continuing growth in demand for data by our customers is driving upgrades to gogo as high.
Right data plans supporting our continued ARPA growth.
It's also worth noting that this ARPA growth includes the impact of our rapidly growing L. Three product line designed for smaller aircraft, which has lower <unk>, but still reflects our exceptionally attractive unit economics.
The launch of Gogo five G will further expand our ARPA growth opportunity over time.
Now turning to equipment revenue.
<unk> delivered $24 $8 million in equipment revenue in the second quarter, a 41% increase year over year as we shipped a record 310 events units.
As we've said previously 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.
That's thanks to the outstanding work by our supply chain team, coupled with our ability to leverage our strong balance sheet to acquire inventory and capitalize on unprecedented demand for our products. We are expecting to ship approximately 1300 total events units in 2022.
This would be a 45% increase versus 2021.
556 of these units were shipped in the first half of the year with all of the remaining 744 ship sets already secured and committed to customers.
Our equipment shipment our expectations for the year combined with our exceptionally strong backlog, an 18 year average equipment life materially Derisked, our long term targets as more units installed drive growth of recurring margin high margin service revenue leading to stronger cash flow.
We delivered strong service margins of 78, 4% in the second quarter of.
Two percentage point increase year over year, driven by a hard margin Atg service revenue.
And a 1% decrease sequentially due to an expected increase in network costs.
This service margin is within our target range of 75% to 80% for Atg for both 2022 and in the long term.
Equipment margins were 31, 9% in the second quarter, a six percentage point decrease year over year.
As we have previously said, we expect equipment margins of approximately 30% for the remainder of 2022 consistent with our strategic objective of driving advanced penetration.
Moving now to operating expenses.
Second quarter, combined engineering design and development sales and marketing and general administrative expenses increased 27% year over year to $29 $4 million.
This was primarily driven by increases in stock based compensation expense and our investment in <unk> as well as development expenses for <unk>.
As a reminder, the executive employment agreements, we updated in March of 2022 as part of our comprehensive succession planning will continue to contribute to increased levels of noncash stock based compensation expense in 2022, and 2023 as compared to 2021.
As we've also stated previously 2022 as an investment year, particularly as we ramp investments for Gogo <unk>.
While the investment levels have fluctuated and will continue to fluctuate quarter to quarter spending for this strategically important project will drive increased operating expenses for the year.
We also started to invest in development for our <unk> initiative in this quarter and this will continue through 2024.
One of the hallmarks of <unk> business model is our strong operating leverage which undergirds, our long term target of adjusted EBITDA margin approaching 50% in 2026.
Importantly, we are already seeing the impact of this operating leverage as in the second quarter. Our cost of service was up just 4% while service revenue grew 13% over the second quarter of 2021.
This translates into a 93% incremental service margin.
Now I'll provide some additional detail on both our gogo <unk> and GBP initiatives and their respective spending profiles.
Starting with our Gogo five G program.
Our $9 $6 million of <unk> spend in the second quarter was comprised of $1 million in opex and $8 $6 million in Capex.
Capex came in lower than expected due to the timing of invoices and related cash outflows.
We expect our <unk> spend with a significant majority of Capex to continue to ramp through the second half of 2022.
We expect <unk> capex to be approximately $50 million in 2022. However, some of the spend could push into 2023 due to the timing of invoices, which are hard to predict.
While it's too early to fully quantify the financial impact of the chip delay of described we believe it would fall into three primary areas.
First as a pushout of Gogo <unk> milestone payments from 2022 to 2023.
<unk>, both Capex and Opex.
Secondly, our backhaul costs may be lower as we expect to delay the ramp in spending to support Gogo <unk>.
And thirdly, we could see some impact in 2023 revenue.
Based on our assessment of the revenue impact from this chip delay, we still expect to achieve greater than 15% equipment unit growth in 2023 over the 1300 units, we're expecting to ship in 2022.
Now onto our <unk> initiative.
As Oak highlighted Gogo has partnered with one weapon used to launch the first Leo based global broadband service in business aviation.
<unk> represents a high priority use of our capital and we believe this program is well positioned to deliver a healthy return on investment, including attractive service margins underpinned by a pay by the drink business model.
In the second quarter, Gogo spent $1 $2 million related to GBP and even with this additional spend we continue to exceed our financial performance targets for the quarter.
We expect external development cost of GBP to be less than $50 million over three years.
A frame of reference this is approximately half of the investment that was required to Gogo <unk>.
We anticipate that approximately 85% of the total GBP external development cost will be opex, including approximately $3 million in 2022 and $10 million in 2023.
I'll talk more about GBP and its impact on our revised cash flow guidance in a few moments.
Moving on to profitability.
Gogo is adjusted EBITDA increased 12% year over year to $41 2 million.
Primarily driven by a 13% increase in service revenue.
This is the second highest adjusted EBITDA performance and Gogo history, even though it includes the $1 $2 million of expense for GBP.
Higher <unk> expenses and higher SG&A, resulting from legal fees for the smart Sky litigation.
Adjusting EBITDA, excluding the GBP operating expense would've been approximately equal to the record we set in the first quarter of this year.
<unk> delivered net income of $22 million in the second quarter translating to 18th and basic earnings per share and 17 in diluted earnings per share.
Net income in this quarter reflection.
Reflection for the balance of 2022 and 2023, we will continue to reflect the increased stock based compensation expense due to the executive employment agreements I mentioned earlier as well as the annual equity grants to all employees.
You may recall that we first granted equity to all employees in 2021, and we continued that practice this year.
Employee equity as a core piece of our retention strategy and we believe that our broad based grants are contributing meaningfully to gogo his track record of low turnover and a constrained labor market.
We expect to incur noncash income tax expense in future quarters as we did this quarter as we continued to generate positive pre tax income.
We also expect to see within the next 12 months to 18 months additional reversals and portions of our remaining valuation allowance against deferred tax assets.
As a reminder, based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period.
We may pay a modest amount by the end of our planning horizon.
Now turning to free cash flow in the second quarter, we generated $15 5 million and free cash flow.
Our second quarter free cash flow was higher than the prior year period due to a decrease and change in the timing of our interest payments following our refinancing last year.
On a sequential basis, this $15 5 million and free cash flow was up from $8 $8 million in the first quarter of 2022, primarily driven by the annual bonus paid in the first quarter.
I'd like to highlight the beginning in the second quarter, we are updating our free cash flow definition to include payments and receipts related to interest rate caps executed as a part of our interest rate hedging strategy.
We believe this change will more accurately reflect the economics of our interest payments and their impact on cash.
I will explain in more detail later the structure of these agreements and their impact on mitigating our exposure to increases in interest rates.
From an accounting standpoint, the interest payments are considered operating cash flows.
Offsetting receipts from interest rate caps are classified as investing cash flows and were not included in our previous free cash flow definition.
We've updated our free cash flow definition to include the cash flows associated with interest rate caps.
The net cash interest paid including the impact of our hedging agreements.
Now I will turn to a brief discussion of <unk> balance sheet.
Gogo maintained its strong liquidity position as we ended the quarter with $164 million of cash on hand.
And our $100 million revolver remains undrawn.
As expected all $103 million of its outstanding convertible notes were converted to common stock in mid may simplifying gogo capital structure, and reducing our net leverage ratio to below four times.
As at the end of the second quarter, we had approximately $717 8 million and outstanding debt on our term loan b.
Our strong balance sheet affords gogo has significant strategic flexibility, particularly in today's volatile macroeconomic and geopolitical environment.
We anticipated rising inflation and have built it into our forecast.
We do not believe that inflation has had a material effect on our financial results.
At a high level, we think about inflation of three parts wage cost increases component cost increases and cost of service decreases.
Starting with wage cost increases in recognition of these economic trends Gogo factored larger wage cost increases into our 2022 budget than in the past.
We manage our supply chain risk by using our balance sheet to purchase inventory up to two years in advance.
Through highly active supply chain management.
And through our strategy of employing common componentry across our product form factors, which allows us to obtain better pricing by driving higher volumes with our suppliers.
As a result, we are seeing component costs in aggregate rise gradually overtime not sharply as inventories used and follow on orders are placed.
Provide additional context cost of equipment represents just 20% of our total opex spending.
Finally regarding cost of service.
Meaningful portion of our cost structure like backhaul is not subject to inflation and in fact, our overall atg megabyte unit costs are expected to stay flat or decline or.
Over the five year planning horizon.
As a result, the impact of inflation on our business swap president is relatively muted.
The rising interest rate environment also impacts golar.
As a reminder, our $725 million term loan B, we put in place in April of 2021, which by the way has proven to be a very opportunistic time to have done this comprehensive refinancing.
Carries an interest rate of LIBOR plus 375%.
In May of 2021, we execute our hedging agreement with interest rate caps to offset a large portion of our exposure to interest rate changes.
As disclosed in our 10-Q, the initial aggregate notional amount of the interest rate caps was $650 million.
And this amount decreases over the life of the caps.
The first step down to $525 million will occur in July of 2023 and.
And it will be followed by other step downs before the cap terminates in July of 2027.
The strike rate increases over the life of accounts from 75.
Percent initially to two seven to seven 5% beginning in July of 2026.
To help quantify our interest rate exposure based on the July forward LIBOR curve, our annual interest our annual cash interest expense would increase by approximately $12 million from $34 million in 2000 $22 million to $46 million in 2026. This.
Level of interest rate exposure is very manageable in our view.
Now I'd like to focus briefly on the topic of capital allocation.
The thinking behind our capital allocation priorities remains unchanged our.
Our capital allocation priorities are aligned with our strategic priorities, which include launching gogo for RG.
Maintaining a target leverage ratio of less than four times investing in strategic initiatives, which now include GBP and returning capital to shareholders.
Given the current volatility of the financial markets and the rising interest rate environment, we find ourselves in.
Along with our board believe it is prudent to be a bit more conservative during these uncertain times.
Therefore for the time being we're choosing to maintain higher levels of cash on hand than we otherwise would.
This dry powder also provides us with the flexibility to evaluate potential new strategic investments and to maintain our strategic optionality.
We will visit returning capital to shareholders more explicitly after the macro environment stabilizes and in conjunction with our ongoing assessment of financially attractive strategic investment opportunities.
Now, let's turn to our financial outlook.
Our previous 2022 guidance and long term targets are derived from the Companys baseline forecast and long term plan and did not include potential strategic initiatives such as GBP.
Now that our <unk> plan has been announced our guidance incorporates the expected level of investment associated with this program.
Our guidance does not reflect the impact of other potential strategic investments.
Or the federal Communications Commission's secure and trusted communications networks reimbursement program as we await further information regarding whether Congress will appropriate appropriate additional funds for eligible expenditures under the program.
I will now offer a few comments on our 2022 outlook.
As a result of our continued strong performance in the demand environment Oak described.
Well go now expect to deliver full year 2022 revenue at the high end of the previously guided range of $390 million to $400 million.
We continue to expect to be at the high end of our previously guided adjusted EBITDA range of $150 million to $160 million for the year.
This includes a combined $9 million of expenses related to GBP and estimated legal fees in connection with the smart Sky litigation, which were not reflected in the initial 2022 guidance.
We continue to expect to deliver full year 2022 free cash flow and the 35% to $45 million range, which includes capital expenditures of approximately $65 million.
Of which approximately $50 million is tied to Gogo <unk>.
Turning to our long term targets, we now expect revenue to grow at a compound annual growth rate of approximately 17% from 2021 through 2026 with GDP expected to contribute to revenue beginning in 2025.
This growth rate is up from the 15% we targeted at the end of Q1, which did not include GBP.
We continue to expect annual adjusted EBITDA margin to approach, 50% in 2026 up from the low <unk> in 2022 and 2023.
While our free cash flow target for 2023 has shifted modestly due to the investment in GBP and other expenses, our 2025 target remains the same.
We now expect free cash flow of approximately $110 million in 2023.
This reflects additional 2023 expenses of $10 million of operating expenses tied to GBP and an aggregate of $5 million of additional interest expense and estimated ongoing legal expenses tied to the smart Sky litigation.
Note that this additional $15 million of expenses, but it's not reflected in the prior 2023 of free cash flow target of $125 million.
Free cash flow and adjusted EBITDA in 2022, and 2023 could be impacted by Gogo <unk> as I outlined.
2023 free cash flow could also be affected by other factors such as additional inventory purchases in response to higher demand and as we discussed it does not include any potential impact from the FCC, a secure and trusted communications networks reimbursement program.
We continue to expect to deliver free cash flow of over $200 million Bill.
Beginning in 2025.
In conclusion, <unk> business continues to perform extremely well.
Our outlook reflects our strong momentum as we continue to capitalize MBA demand prepare to launch Gogo <unk> into the market and pursue the development of our global broadband product.
Before we open up the call to your questions I would like to extend.
Our heartfelt thanks to the entire Gogo team as good as well.
Commitments your creativity and can do attitude inspire us as your leaders delight, our customers and create significant value for our shareholders. So thank you.
Operator. This concludes our prepared remarks, and we're now ready for our first question.
Thank you and as a reminder to ask a question. Please press star one one please standby, while we compile the Q&A roster.
And we will take our first question from Scott Searle from Roth Capital Partners. Your line is open your lines.
Hey, good morning, guys. Thanks for taking my questions nice job on the quarter and nice to see all the details on the growth as we go into 2023, even with a little bit of a wrinkle on the <unk> front.
Maybe to dive in on the <unk> issue, Okay, if I could.
Is is the timing delay is there a new <unk>.
Spin that's required on the chipset is there somewhat technology issue or is this really related to <unk>.
Capacity and availability at certain process geometries.
The chipset supplier and I'm I'm wondering also as well if you could couple into that discussion it sounds like youre seeing.
<unk> attach rates in terms of.
Current installations being.
Major support five when it becomes available I Wonder if you could talk about.
How that is as a percentage of the new units that are going out and maybe also just the position that to the.
The competitive landscape in terms of what Youre seeing from smart Sky and Star Lake.
Alright, Scott that's a lot of questions, but I'm going to start with <unk>.
So we got here on Monday are ready to declare victory on this project and the way we're going to launch in Q4. So.
It's very late breaking news that we got on Tuesday.
And ironically.
The chip is stuck in test mode and can't be moved to operational mode.
In testing it got stuck in test and.
The issue there is that the way. These chips are built in the multiple layers.
Test mode touches almost every layer and so.
They have not been able to identify the exact source of the problem with the test mode.
Worst case, Scott would be a re spin and that's why we've kind of talked about mid year that would be.
If there was a re spin it.
It maybe that it won't have to be a wristband will know that in the next couple of weeks, we are working with.
The subcontractor to our span who is producing this chip.
Hard right now on ways to.
To get the chip done sooner than mid year.
Looking at some pretty.
Frankly innovative ways of actually starting our ability to test on that chip.
Before they would do a spin even and so giving us the ability to.
Replicate that chip.
In our system and continue with our end to end testing. So we're working on all of that we're trying to derisk. It.
We do.
Did reflect the change in projected sales next year, when I talked about the 15% would have been higher than that before this news.
So more to come on that Scott, we're still somewhat in discovery mode and as I said, it's very this is very recent news.
Second part of your question was does that the smart Sky provisioning. So yes, we just started this.
We had a pretty positive response because.
What customers can do this.
At the outside box is actually part of the <unk> product right. So they can take all.
Five they can take the envy 13 antennas, which are the new antennas.
For the <unk> product and install that on the aircrafts those antennas, obviously worked with both <unk> and <unk>. So they'll just be flying on the <unk> network for some period of time, and we're selling them the harnesses and everything else that goes in place to handle the <unk> III box that sits next to the.
Five and gives you the <unk> capability. So what would happen is that they can fly there will have an allo five experience.
Until we can ship them the X three and then they just slap it in place and everything is already they are very easy to put in so that's what we're doing and we've had a pretty positive response I mean I think.
The only limit right now, we're just ramping up production of the <unk>. So we're a little bit.
We're supply constrained there we weren't planning on being launched quite soon.
But that that production is ramping up.
And I think.
Got something like.
15 that are going to be shipped this year and I think we're looking at orders already for next year of 30 of those and those we've only been taken them for a couple of days a couple of weeks. So so that's that.
Then I think the last the last piece of your question was around smart Guy and competition.
They.
They put a press release out last week that they are quote unquote life nationwide.
Would agree with that their live in parts of the nation.
Cross the nation, they're alive in the southeast.
It goes up a bit to Chicago, they've got some towers around.
Around.
Chita.
ROTC flying through.
A lot of the Oems and dealers up there they are live in Las Vegas, where they've tested and demonstrated several times in there.
Certainly why about California, where they were getting ready for the <unk> launch that they lost.
So, but we don't think they have nationwide coverage in.
So that's still to come and so there the dealers aren't taking them seriously right now we don't see any traction.
<unk>.
<unk> made some announcements with a couple of dealers that even those dealers have they haven't sold anything we've heard of one or two claims that might be getting installed.
Mostly to be used as test aircraft.
If the system works, so that's I think where that stands.
Great and.
Thanks for that color and if I could just a quick financial follow up for Barry then given the timing of the network. The <unk> network terminal turning on I would imagine gross margins on the services side stay a little bit higher in the second half of this year until you start depreciating the network and maybe some of the <unk> opex kind of slips into 2023 is that correct.
Yes regarding the.
Turn on Thats correct, Scott so they appreciated wouldn't start until it gets fully deployed and turned on and we do expect some of those expenses a slip as I mentioned.
The backhaul expenses, we would not have to start quite as soon so we would see some benefit from that relative to what our previous expectations were and then there could be some.
Timing in the <unk>.
Slippage from the expenses on both the Opex and Capex side, because they are tied to milestones so if and as those milestones would slip.
The expenses with slip.
And that could go from 2022 to 2023.
Great. Thanks, so much ill get back in the queue.
Thanks Scott.
Thanks Scott.
Thank you.
And our next question comes from Ric Prentiss from Raymond James Your line is open.
Thanks, everyone.
Hey, Rick.
The earnings day, So I won't take you right to the.
Updated long term guidance, if I could the change from 15% revenue CAGR to 17% revenue CAGR help us unpack that about how much of that was coming from product versus services.
And services it sounds like Youre still thinking probably the bulk of service revenue comes from units with some benefit from ARPA, but help us understand what changed from the 15 to 17 kind of the components.
Sure.
Really the primary driver of growing from 15 to 17 is the addition of GBP, but that was not included in the previous projection. It was as we described an overlay. So while it is early days, we do expect that to begin to contribute to revenue in 2025, and so for that planning period, we do see that having a 2% lift in.
The CAGR and we see that continuing to really drive revenue.
Revenue growth for the balance of the decade, So thats really the hope for that project as it is.
<unk> return on investment and importantly by sustaining growth in the year.
And the the revenue growth in terms of the drivers of the growth.
That has not shifted meaningfully between.
Aircraft online and ARPA, so the lion's share of that on the order of three quarters that 15%.
Previous CAGR was from increased number of aircraft online with the balance coming from increased <unk> and <unk>.
Drivers of the <unk> are.
As people upgrade their plans and use more data and as Doug described we're seeing a lot more upgrades to plans and downgrades and then as you see the benefit of the <unk> product coming online that also as a risk.
The offset to that is as we get into the <unk> income.
Smaller aircrafts, they have lower ARPA, but importantly, the unit economics.
Like on a revenue per megabyte basis are still very attractive.
<unk>.
And the change from 15% to 17% with GBP is GBP kind of the same 35, 75%.
Units or kind of help us understand the split is what does the GBP look like as far as that incremental is it units as at ARPA is it equipment.
Well in the earliest days, we will get the benefit of equipment and but very similarly, it will translate.
Into service revenues. So so it's very comparable service margin service model, where we would sell the equipment, we believe that our margin.
And then and then that drives into the high margin servicer.
Right and as far as sales because I think Echostar mentioned yesterday, we expect to start selling yes. As earlier published supplemental type certification has to happen, but as far as GBP revenues are thinking of sort of more of a 25.
Yes, that's our expectation yes.
Okay, Thanks, everybody stay well.
Thank you Rick Thanks, Rick.
<unk>.
Thank you and we will take our next question from Lance Vitanza from Cowen Your line is open.
Hey, Thanks, guys and congrats on the quarter I want to start with.
Shipment outlook.
What does greater than 15% shipment growth translate to in terms of aircraft online, which is how I drive my model at least it will well aircraft online be up 15% and 23 versus 22 or is there sort of a walk down to something lower than that.
Yes, I think what we would expect lance's for us to see that proportionately carryforward as it does for our ongoing business and as you know.
It made for a portion of the.
The unit shipments are for upgrades and so so that modestly help CRP, but very importantly that is very much in line with our strategy for driving advanced penetration. So that's really what we're trying to do and so that will that will supplement that that objective as well, yes, I would say right now about a third of units or upgrade as we go forward.
Our group adjusting that to pick up somewhat.
Two thirds of new.
The.
Remember Lance will be getting more planes a.
A lot of what we ship this year will lag will get installed until next year OEM orders in particular, usually bulk orders.
And so they can sit on the shelf for a while.
<unk> seen a lengthening in the time between shipment and installing the dealers just because.
In a supply constrained world dealers are ordering sooner than they did in the past and I think that's gone from what Jesse four months to five months something like that in terms of lag time, So we've seen a little extension there so.
In terms of the units shipped were going to do about 3500. This year as we said and.
You can just slap that 15% on top of that in terms of the number of units that will be going out.
Just having great at other one other piece quantification lapses that.
The units online really represented about 12% of that 15% CAGR.
Had before so that's the primary driver is still up there of the overall revenue growth.
Okay, and then that's really helpful color.
Back on the supply piece that you mentioned so for me I've never been worried about the demand. It seems like the question has always been.
Can you get the parts and the labor and so forth to be sure that you can fulfill the demand to get to this 15% plus.
Plus 15% shipment guidance, how are you feeling about that from where you sit today.
Actually we're feeling much better.
We.
I said in my comments.
Have secured the supply for the <unk> hundred we are feeling confident about that.
The issue for US right now frankly is we're getting a bit late in the year for people to order more.
And but we are seeing some loosening in supply and think that we could actually perhaps ship some more units or very close to two.
Having everything we need to build more units, but I think given the lateness of the year that that will actually just helps supply for next year.
And our supply chain, guys, who we've sat down with Navy.
<unk> day before yesterday.
I'm quite confident about the guidance I just gave you on the 15% above the 1300.
Okay and then just lastly for me the decision to carry more cash certainly seems prudent given the macro headwinds, but you also mentioned some potential strategic items and I'm. Just wondering are you referring to bolt on M&A or big new investment projects or bolt or something different.
No we've always said Lance it we had.
A number of strategic initiatives, we were thinking about a lot of them.
Focused on leveraging advance or strengthening our atg network.
We still have set some of those in the hopper in terms of the.
Analysis and figuring out the.
The business model or whatever partnerships might have to happen to make them work and so.
There there is nothing really new there we said in the past we have we're really not looking at M&A.
I think that's still true today, not saying that sometime down the line that would change but today, we're not looking at M&A. So it's the same consideration set frankly that we've had for a while.
Okay. Thanks, guys I appreciate the help.
Thanks, a lot less.
Thank you.
Our next question comes from Louie Dipalma from William Blair. Your line is open.
Hey, good morning.
Good morning.
A question for Barry.
What did you say it will be.
Net cash interest expense for 2023.
At the ramp at the end of the time horizon.
Horizon 2025.
Yes, what we said Louie to provide some quantification of the impact of the interest rates is that we'd expect that to go up about $12 million on an annual basis. So that goes from.
34 million to $46 million in 2026.
Thanks, Amit.
Based on a LIBOR forward curve so.
Certainly that could change, but just going after July forward curve.
Those are the numbers.
Okay.
And for that 34 million is that.
The noncash interest expense that we should expect for 2023.
And the $110 million.
Free cash flow guidance.
It's $34 million in 'twenty, two and then we expect that to tick up a million or $2 in 2023, because it's largely hedged.
Based on accounts, but that again.
Yes, and it is reflected in that.
Got it right yes.
Yes, so the $5 million.
So just to do the quick walk for the changed from $125 million in previous free cash flow expectation for 2023.
That is reduced by $10 million for GBP, and then by additional $5 million for the interest expense and we have set aside some additional expense for ongoing litigation with smart is going to carry into 2023 was touring a five.
Correct.
Great and for the longer term 2025.
Cash flow guidance.
Would you say in theory.
You raised.
Core free cash flow.
You reiterated the guidance and now you have I think you just said.
$13 million.
Increase in cash interest expense from our floating rate.
Scott.
Well, we are still maintaining the view that will be over $200 million in 2025.
So that that does accommodate some additional increase.
Expense and interest we will begin to see the impact of global broadband in 2025, I'd point out that the expenses.
<unk> through 'twenty four.
As you can see they ramp pretty meaningfully from 23% to 24. So so we would expect to see kind of an inflection point an increase in free cash flow as we get on the other side of the GBP investments.
So that inflection would begin in 2025 and it's the continuing strength of the.
The core business as these strong unit shipments translate into service revenue, that's a big part of what's driving it.
Great and one question for Al if.
If I may.
The ability do you have.
On the approximate.
<unk> hundred and Atg shipments that you are expecting for 2023 do you need to win more orders are most of those in the backlog.
But not most of them are in the backlog, but we have a lot of backlog and frankly, we've got more in backlog.
Than we've ever had before.
Time of year. So we feel very good about it this is based on our.
The conversations now that are going on with dealers in terms of what theyre going to order we haven't they haven't put in but we've got a lot of indications in terms of what they're going to want, especially the big dealers.
We're in conversations with them now and the Oems So it's based on that.
We don't have firm orders for all 500, we would.
Operator.
Settled out.
And in fact.
In terms of just to give you a frame of reference.
800 units I think we settled out finally, a couple of weeks ago are now kind of sold out for the year, but but and we're taking orders for January of next year, but that's in a very strong year thats. When we closed the book on the year. If you will so yes.
Yes.
Did you.
Fly in one of your earlier comments.
The.
The 1500 Atg shipments guidance would have been higher if you didnt receive.
That call on Monday, or Tuesday from <unk> about the.
GE chipped away.
Yes.
Yes.
We think we can mitigate.
Some of that delay because.
You have to get in all five box anyway to install five G. So the people that are.
We're going to be selling by all five boxes and NV <unk> with the harnessed kits for the X three box or <unk> add on but we still are.
Just being prudent right now we haven't worked through all of it.
So we felt we ought to take that number down.
Sounds good that's it from me thanks, everyone.
Thanks Louis.
Thank you.
And our next question will come from Landon Park from Morgan Stanley . Your line is open.
Great. Thanks for taking my questions everyone.
Just on the global broadband at 17%.
Can you just share.
If a unit.
Sales expectations, you have for 25 and 26.
That are driving the 17%.
And Hughes yesterday, I think it indicated the $170 million.
Revenue.
The payments that you've agreed to with them covered about 2000.
The antenna units is that.
Correct.
In terms of what we should be thinking about.
In terms of the cost of those units to you.
And then just one last one on global broadband how should we think about your positioning against.
Satcom direct.
Our partnership with <unk> and their own antenna supplier.
Yes, let me take the first two and I'll, let <unk> add.
The third one so regarding the units, we're not going to get into the unit projections.
But what I would say is that the market share projections that we have underlying the revenue.
We believe we are very conservative when we look at the overall size of the market and our ability to penetrate.
We have disclosed the $170 million in commitments that we've made to us we have not disclosed the units associated with that but again, we're comfortable with that level of commitment in October a long period of time, and we think relative to what we believe a very conservative market penetration assumptions Thats, why we got comfortable making that kind of commitment.
Yes in terms of competition with Satcom direct.
We compete quite effectively with with them today they are.
Sort of a niche provider at the high end of the market.
And a reseller of other People's.
Satellite networks.
Very successful company, we have a lot of respect for them.
They are their antenna technology is different than ours. It has remarkably similar initials, but they don't stand for the same thing and it's a it's a very different approach we think.
Our antenna will fit better and be a better option, especially for the medium sized jets on down there.
But.
And there are obviously there.
Another one web partner.
So.
I think they will have success I think we will have successors 30000 jets in the business and turbo props to split between the two of us.
So plenty of growth for everybody.
Okay can you maybe just elaborate in terms of what you're seeing.
The advanced platform, obviously just.
What are some of those key differentiating factors on the antenna side.
Well there is.
Made by cap, it's a essentially it's a.
The approach is very different you know ours is a silicon.
Board essentially that.
<unk> electronic beams.
Across some micro elements. If you will that are embedded in that order.
Flat.
There is use these little cones and it's essentially.
A.
Think of it as a.
The typical array antenna this or this chopped up and lots of little pieces and flattened out.
Made of metal is going to be heavier than ours.
And I think it's a little uncertain on the sides, yet I've seen different.
Different.
Yes.
Data on that but we.
We know about from cast on this is that it's <unk>.
Quite a bit larger than our intent is that going to fit.
Medium sized jets on down.
Okay.
Thats helpful.
Sorry go ahead.
I mean, I say, which is where the bulk of the numbers are in the market rates.
Well very happy they have.
I've said that they will be able to fit on medium and small jets right, though.
Yes, I said that.
A press release that was kind of rushed out at the E. Bay's convention in Geneva, when they saw that we were announcing.
So I would I would challenge them on that.
Assertion okay.
Great. That's very helpful. And then just one last one I guess on the 23 free cash flow.
You issued that last year, you've had some operational outperformance since then.
Yes.
What would what should we think about in terms of the limiting factor that.
It didn't allow you to absorb some of that $15 million.
An additional expense.
Yes at least partially.
While we.
We're basically I think you've been pretty clear about what's in that so we knew that the global broadband initiative expenses that were not going to be reflected in that so we tried to.
Condition.
The street to understand that that was coming and so so that is very much in line with where we expected.
You might remember that in that 125 was an upgrade from a 100.
<unk> been saying, we were going to exceed 101 25 reflected the improved performance that we have yes, yes correct.
Correct.
We have had operational outperformance since even the 125 of this year. So I'm just wondering.
Yeah.
Should we just view it should we view that as conservative or are there any other factors, we should be thinking about.
Well, it's also I would just point out.
We haven't been through the full blown budget for next year. So so the way our planning process works is we do a forecast update every month and then mid year. We do an early look at the following year. So if this is our first early look.
So when you just want to make sure as always.
We're going to do we are able to do so and I think that's right.
Great Alright, I appreciate you taking my questions. Okay, Thanks, Glen and thanks Linda.
Thank you and I am showing no further questions at this time I would now like to turn the conference back over to will Davis for any closing remarks.
Thank you everyone for joining our call. This morning have a great day. This concludes our call.
Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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