Q3 2022 Gogo Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
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Good day, and thank you for standing by welcome to the Gogo third quarter 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.
Ask a question during the session you will need to press star one 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, Vice President of Investor Relations. Please go ahead.
Okay.
Thank you Liz and good morning, everyone welcome to <unk> third quarter 2022 earnings conference call joining.
Joining me today to talk about our results are hopefully foran, chairman and CEO and Barry Rowan Executive Vice President and CFO .
Also listening in on the call is Jesse Betjeman.
Senior Vice President of Finance and Chief Accounting Officer.
Yes, he 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.
These 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 SEC.
In addition, please note.
At the date.
The date of this conference call is November three 2022.
Any forward looking statements that we make today are based on assumptions as of this date we.
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 third 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 hopefully.
Thanks will good morning, everyone and thanks for joining us today.
In the third quarter Gogo continued to demonstrate its ability to deliver record performance in a highly dynamic macroeconomic and supply chain constrained environment.
Strong demand for in flight connectivity combined with Gogo is innovative advanced platform and strong operational execution enabled us to deliver a very strong quarter.
We believe all of those factors will remain intact for the foreseeable future and.
And position us to generate growing recurring revenues and robust cash flow for the next several years.
A key to our success is our advanced platform.
Which allows us to deliver equipment form factors designed to serve every size business aircraft all running at the same software and all capable of being easily upgraded to our future <unk> and global broadband products.
As a result, we're bullish on our ability to retain our current customers and to capture a large portion of the roughly 30000 business aircraft around the world that today fly without broadband connectivity.
Today I'll focus my remarks on first our strong third quarter results and updated guidance.
The VA connectivity tailwind, that's helping to drive our growth and third our progress on Gogo as key strategic strategic initiatives of <unk> network, and our global broadband or <unk> project.
So let's start with our Q3 performance.
We delivered record third quarter revenue of over $105 million.
Nearly 21% of the prior year fueled by outstanding service and equipment revenue growth.
$55 million to $170 million.
This new 2022 guidance does reflect some puts and takes.
Including a 5 million dollar reduction in five G. Opex as a result of the delay in our five G chipset, the majority of which will shift to 2023.
<unk> for the full year by $6 million in a combination of legal fees related to the smart Sky litigation and G. B be spending that we're not in our original 2022 guidance.
Now, let me turn to some of the business aviation Tailwinds driving like Brooks.
Demand for B, a connectivity remains very strong.
Longterm that demand is driven by a number of factors that are secular and sustained.
First the digital transformation of how we all need our social lives and do business and the younger profile today's P. A passenger may connectivity table Stakes for business aviation passengers.
<unk> passenger expects an insight connectivity experience.
Equivalent to their home office or living room.
And that is translated into higher data usage for goat.
Data consumption per hour by Google customers continues to grow significantly.
14% over prior year in Q3, which is consistent with the growth that we've seen for the past six quarters.
Consistent usage increases are driving customers to upgrade to go goes higher rate plans at a ratio of about two upgrades for every downgrade, which.
Drove <unk> to $3376 per month.
$112 for 3.4% from prior year.
We also grew aircraft online or a O L significantly over prior year temper.
10% to 6777 aircraft of which 3079 or 40.
45 per cent were on the advanced platform up 36% from prior year.
Replace with the growth of our advanced installed base because advanced allows customers to easily upgrades new bears like our Gogo five G and one with Leo networks at much lower cost than ripping out our equipment and replacing it with competitive.
Increased travel demand is another factor that continues to boost activity across the industry.
Even in the face of macroeconomic pressure yoga flights route five per cent of a prior year in Q3 and 30.
<unk>, 30% over Q3 2019.
Corporate flight departments, showing the greatest growth.
Across our distribution channels, we continue to see strong demand.
We were at the M. B double a convention two weeks ago, where I talked with a number of our dealers all of them said there was busy as I've ever been.
Increased slight hours have given the faster pace of maintenance or maintenance events, which in turn gives them more opportunities to install more gogo systems on more aircraft.
This is translated into a bump in 2022 2023 orders versus wherever we were on <unk> on 2022 orders at this point last year.
However, a bigger change from last year as our confidence in our ability to meet.
From a supply chain perspective are in great shape.
We brought the times down to three months.
<unk> buffer stock to drop in orders, we've got clear line of sight to me almost all compounded demand for 2023.
Very few cases, where we see potential constraints those constraints dot appear until late in the year, giving us plenty of time to remediate.
On the I M site demand also remains strong.
Last week, both Textron and Gulfstream reported solid third quarter results.
Strong order books backlogs and book to Bill ratios.
Further at the M D double Asia last month, Honeywell increase it annual tenure business jet forecast to 8500, new jet deliveries of 15% from the 2021 forecast for 7400 deliveries.
And finally, the expanded cohort of V. A passengers catalyzed by the pandemic appears to be sticky.
New research this month shows that 94% of all Flyers, who started using private aviation since the pandemic plan to continue flying private aviation Postpay on desk.
So now let me turn to our strategic initiatives.
Which are focused on continuously improving our products and services.
Creating easy upgrade path for our customers and expanding our addressable market.
Before getting into the initiatives I think it's worth pausing for a moment to reflect on how far we've come and how far it will go over the next few years and improving connectivity the aircraft.
Not long ago, we were delivering kilobytes per second over our legacy T G network and narrow band satellite products.
That's gonna multiple megabytes per second today with advance L. Five.
That will grow the thousands of megabytes per second would go over five G. By the end of next year.
And we'll go out hundreds of Megabits per second over the next couple of years as we deliberate evolve globe.
Mobile broadband stand alone and in combination with a T G.
So let me start with five G.
As I'm sure you're all aware, we receive some disappointing news immediately before a Q2 earnings call.
Our five G supplier ear span informed us that there was a flaw and samsung's fabrication of our five G chip that locked the chip in test mode.
We've just received final commitments from air span and their chips supplier that Samsung will need to re spin the entire trip.
Air Spin will now receive the chip and due to next year, we will test fly in Q3 and that should put us all in a track for commercial launch into for.
That said, our five G team has done a tremendous job delivering uhm nine five G chirp related milestones on time and on budget, including installation of 900, <unk> antennas on 150 towers across the country and completing all manufacturing capability and certification of the equipment that goes on the aircraft.
Our wedding for as a small five G chip, which will be a minor amendment to our existing certifications and then we'll be off and running.
<unk>, we've already started selling shipping and installing that equipment, which includes the five G antennas and the harnesses to install a five G box.
This equipment can be installed without <unk> Firefox today and running our four G network and then easily accommodate the box with the five G chip in the pre provisioned and install a harness at a later date.
Our dealers are on board with this approach so far we've delivered eight shipsets to customers.
More than 60 and backlog.
The market remains very excited about our five G product is it will deliver roughly speeds roughly five to 10 times faster than Google currently T. G network with peak speeds up to 30 times faster, enabling multiple streaming sessions and video conferencing applications to be opened at the same time on the same aircraft and all at a lower cost and.
Competing Leo G O satellite solutions.
On the commercial side, we're continuing to hear tremendous excitement about our five G products from jet fleet owners of all sizes.
G around this launch it empty double a was palpable and we believe the proof of the pre provisioning momentum we've seen so far is indicative of that.
Go go was working closely with each of the D. A O M is online fit in with several authorized dealers to complete S. D sees that will cover most major makes and models.
And.
Now, let me turn to G. B B the latest extension of our growth pipeline.
We're making great progress in delivering the first global broadband product deserve all the business aviation market.
That includes all sizes of aircraft in all corners of the globe.
We're partnered with one web to utilize their global Leo network, which is already more than two thirds launched.
Pulling in electronically gerbil, Montana or Esa in conjunction with our partner Hughes. It is small enough for installation on the fuselage of the full range of business aircraft.
Light Jets blood sugar prompts all the way up to large ultra range aircraft.
Doug Global broadband will allow us to first pursued the 14000 visits aircraft outside North America, a huge increase to our total addressable market.
Second pursue large north American jazz supply global missions and today often used go go with the U S. G O satellite solutions outside the U S and.
Third drive enhanced stickiness in our core North American medium size or smaller aircraft segments by offering an easy upgrade path to a leo product when they want the additional capacity the Leo can provide.
A critical point is there are advanced multi bearer capability will allow us to serve north American aircraft with Leo and a T. G. At the same time.
Significantly enhancing capacity.
Providing redundancy for those owners who want us.
Critical to the success of G. B B is the ease of our upgrade and installation.
The customers are already have advance the upgrade add Leo will be simple.
E S antenna on top of the plane and ran two wires inside one for data and one for power.
Then have Leo connectivity with all the added functionality of events.
Customers New to go go they can choose from an array of advanced form factors, including the economical Ses box and then pair that device with Santana for a relatively low cost solution.
GBP will enable screaming directly from your favorite services multiple simultaneous video conferencing sessions VPN access and all the other connectivity enabled solutions you use today at the same service levels you expect in your office or living room today.
We're excited about the opportunity this initiative will create for <unk> and our customers.
Ear and longterm.
Our investment GBP today is setting us up for success in the next era of Leo satellite technology, and expanding our rach, we're capitalizing on our expertise and tailored solutions that exceed the expectations of customers across all segments of the market.
To wrap up.
Key strategic initiatives driving advanced penetration launching yoga five G and developing global broadband.
Service of our long term strategy deepening and expanding go those hard earned competitive advantages to support a longterm growth.
I'm very proud of a nimble creative and energetic gogo team for their accomplishments in the third quarter.
Innovating and delivering a major strategic projects to said go up to exceed our customers expectations and drive longterm value for shareholders. Thank.
Thank you T.
With that I'll turn the call over to Bury <unk>.
Thanks, and good morning, everyone.
My remarks today I'll start by walking to go goes record third quarter financial performance.
I'll touch on Google capital allocation priorities, and finally finish up with some additional context around our guidance.
For the third quarter, our record total revenue of $105.3 million grew 20.8% year over year.
Top line was driven by record service revenue $75.3 million is a T. G units online through 10% year over year and 2% sequentially.
Is oak mentioned, increasing penetration of match and leveraging its platform capabilities.
The centerpiece of our strategy.
Both in the North American market, where we operate today and globally as we lance or GBP product in the future.
The third quarter advanced units online grew by 186 units of 38% year over year and 6% sequentially.
As we grew R. A G G units online H U ARPA through three <unk>, 3.4% year over year to 3376.
<unk> continued to upgrade their plans, including to our high data rate plans, which have been very well received since their introduction in early 2021.
I want to go to a five G followed by our Govt product will further expand our growth opportunity overtime.
Now turning to equipment revenue.
Livered a record $31 billion in equipment revenue in the third quarter, a 43% increase year over year.
We shipped a record 388 advanced units.
This is an increase of 47% year over year.
And 25% compared to the previous quarterly record, we just achieved in the second quarter of this year.
Are excellent supply chain team and ability to leverage our strong balance sheet to acquire inventory is allowing go to capitalized on unprecedented demand for our products.
Now expect to ship more than 1300 total advanced units in 2022, representing at least a 47% increase compared to 2020.
Our equipment Shipman expectations for the year combined with are exceptionally strong backlog and 18 year average equivalent life materially derisks are longer term targets.
The impact of 2022 equipment shipments is allowed us to once again raise our 2022 revenue gardens, which I'll touch on later in my remarks.
Go to delivered service margins of 77% in third or a 3% decrease year over year, primarily due to the $2 million ketchup credit for federal Universal Service Fund regulatory surcharges.
And two 320 21.
Service margins decreased sequentially.
Triste.
Due to an expected increase in network costs.
<unk> associated with the deployment of the Google Five G network.
The service margin is within our target range of 70, 580% for a T. G for both 2022 and the longterm.
Equipment margins or 35.9%.
This represents a 5% decrease year over year, which was planned as a part of our strategic initiative to drive advanced penetration.
However, equipment margins actually increase 4% sequentially due to higher revenue in lower production costs as a percentage of it.
This improvement was also driven by a higher mixer event sales, which carry higher margins that our legacy satellite products.
Senator of advanced sales increase from 83% to 87% sequentially with our legacy satellite products declining by a corresponding amount.
Moving now to operating expenses third quarter, combined engineering design and development sales and marketing and G&A expenses increased 11% year over year to $29.7 million.
This increase reflects legal expenses related to the smart Sky patent litigation and development expenses for G. B B.
Partially offset by a decrease in stock based compensation experience.
Non-cash stock based compensation expensive the third quarter decreased year over year due to the ketchup experience insured last year relating to investing for employee retirement, which primarily impacted G&A.
As a reminder, executive employment agreements put in place as part of our succession planning will continue to contribute to increased loans of stock based compensation expense in 2022, and 2023 as compared to 2021.
We also began granting equity to all employees beginning in 2021.
Contribute meaningfully to our employee retention and also results in higher stock based compensation experience.
There's always you 2022 is an investment year due to the plan rampant spending for go to five G.
Operating expenses were actually slightly lower this quarter than initially expected due to the reduction in five G expenses related to the chipped away.
However that spending as well as five G operating expenses previously expected to be incurred in the fourth quarter.
Now shift to 2023.
In addition, we continue to invest in development for our GBP initiatives and a quarter and this will wrap up to 2024.
Now I'll provide some additional detail on our Google five G and G B D initiatives and their respective spinning profiles.
Before jumping into the details of our five G spelling I wanted to be very clear that the <unk>.
Lay in our five G chipset availability only impacts the timing of when our <unk>.
Five G spending occurs.
Do not expect to have it to have any negative impact on the overall five G program costs, which remains on budget.
And the third quarter or $18.5 million or five G standings comprised of approximately $9 million and opex and $17.6 million in capex.
We expect five G capex and approximately $40 million 2022, a reduction from a prior expectations due to the chipset.
The financial impact of a chip delay falls into three primary buckets.
First to push out five G milestone payments certification and testing costs from 2022 to 2023.
Second lower back Holocaust in 2022, given the delay in spending to support Google five G.
Note that are lower back home costs in 2022 represent actual savings this year.
And thirdly R 2023 revenue expectations will be impacted by the <unk> five G. Commercial launch, but is now expected during the fourth quarter of 2023.
The reduction in five G. Spending is comprised of approximately 9 million dollar shift from 2022 to 2023.
A million dollars, which is operating expense and $5 million is capex.
Long was approximately $1 billion backhaul expensive.
These reductions are reflected in a revised 2022, adjusted EBITDA Capex and free cash flow guidance.
Now onto our GBP initiatives.
We are excited by the opportunity GBP will create for yoga as it is well positioned to deliver a healthy return on investment including attractive service margins.
Importantly is also based on a variable cost paid by the drink business model as prescribed in our partnership agreement with one way.
And the third quarter Gogo recorded $1.8 million GBP operating expenses related to the achievement of project milestones with us our internal development partner.
We continue to expect external development costs for G. B b to be less than $50 million over three years were spent ramping from approximately $3 million in 2022.
$10 million in 2023 with.
With the remaining approximately $35 million to be incurred in 2024.
We also anticipate that approximately 85% of GDP external development costs will be in Opex.
This spinning profile is reflected in our 2022, adjusted EBITDA and pre Castro guidance and in our combined 2022 and 2023 free cash flow.
Now moving on profitability.
Third quarter, adjusted EBITDA increased 7% year over year to $43.7 million, primarily driven by our records equipment sales.
This is the highest adjusted EBITDA performance he goes no history.
Whoever delivered net income from continuing operations of $22 million in the third order up 2.5% year over year.
I would note that the <unk> the Q3 2022.
Is net of an 8 million dollar income tax provision compared to a $100000 income tax provision in Q3 2021.
Our financial statements reflect noncash income tax expense as we continue to generally positive pre tax income.
While we may have fluctuations in our effective tax rate.
Believe that using the combined federal and state income tax rates, 25% of the current rates would be a reasonable assumption for modeling purposes.
Net income before income taxes increased 42% year over year.
Collecting the profit generating capability of the Google business model as we continue to execute on our strategy.
Third quarter net income translates to 16 cents and basically for sure.
15, and diluted earnings per share.
These figures reflect a final settlement of our 2022 convertible notes, which.
Which occurred in the second quarter of 2022.
Based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period.
So we may pay a modest amount by the end of 2026 planning horizon.
We continue to expect to see additional reversals of portions of our remaining valuation allowance against it for tax assets over the next 12 to 18 months.
And the third quarter, we generated $8.5 million in free cash flow down 65% year over year, driven by the expected increase in Capex with five G.
Now I'll turn to a brief discussion of our balance sheet.
Google maintained it strong liquidity position as we ended the quarter with a $152 million in cash on hand.
And we have yet to draw on $100 million revolver.
Our cash balance decreased from $164 million as of June 30th 2022, reflecting the share repurchase executed in September .
You'll recall that we repurchased one and a half million shares of common stock owned by a totally it's a black rock in a private transaction for $18.4 million at a price of $12.23 per share.
As of the end of the third quarter, we had approximately $760 million in outstanding debt on our term loan B and.
Leverage ratio of three four times.
Hello, our target of less than four times, which we achieved in the second quarter of this year.
Now I'll touch on a capital allocation strategy.
A capital allocation priorities are in service of our strategic goals.
These priorities include launching Google five G commercial service.
Maintaining a turbo leverage ratio of less than four times, which may include paying down debt.
Investing in strategic initiatives, including G B b.
And finally, returning capital to shareholders.
The comprehensive refinancing we completed in the second quarter of 2021, which includes our seven year term won't be carrying a variable interest rate of LIBOR plus $3 75 per cent.
Meaningfully limits, our exposure to refinancing risk.
We are also well hedged with interest rate caps offsetting a significant portion of our exposure to interest rate changes.
Of note the fair market value of a hedge contract has increased by $46 million before taxes since putting it in place in may of 2021.
Heels of our comprehensive refinancing.
As outlined in our 10-Q the portion of our term loans subject to interest rate caps reduces beginning in mid 2023, which will increase our exposure to higher interest rates.
To quantify that exposure based on the October forward lineup curves.
The interest rate caps, we have in place or annual cash interest expense would increase by approximately $13 million from $37 million in 2000 $22 million to $50 million in 2026.
Given the current volatility of the financial markets, and particularly the rising interest rate environment.
We believe it is prudent to take a somewhat more conservative approach during these uncertain times.
As we mentioned last quarter, we are choosing to maintain higher levels of cash on hand, given these external circumstances.
A higher cash reserves allow us to preserve maximum strategic and financial flexibility.
We saw the benefit of having this flexibility in the third quarter.
As previously mentioned, Google repurchased wouldn't have many insurers common stock at a value of $12.23 per share.
This share repurchase was indicative of our confidence in the longterm value creation opportunity.
[laughter].
Now, let's turn to our updated financial out.
As a reminder, or guidance does not reflect the impact of the federal Communications Commission's secure interested communications networks reimbursement program.
As we await further information regarding whether Congress will appropriate additional funds for eligible expenditures program.
Once again raised our top line guidance for the year.
Go go now expect to deliver a full year of 2022 revenue in the range of $395 million to $405 million versus prior guidance at the high end of the range of 392 $400 million.
This increase was primarily driven by our exceptionally strong equipment shipments as we've described.
We also raised or 2022, adjusted EBITDA look to the range of $165 million to $170 million versus prior guidance at the high end of the range of 150 to $150.
This increase reflects a $5 million reduction in operating expenses associated with lay in the commercial launch Google five G.
But it also includes a combined $6 million in expenses related to the smart scan litigation with mobile broadband which were not included in our original 2022 guidance.
We are raising our 2022 free cash flow guidance to arrange a $50 million to $60 million.
Versus prior guidance of $35 million to $45 million due primarily to a 10 million dollar production and.
And five G spending.
R 2022 free cash flow guidance includes capital expenditures of approximately $55 million.
Of which $40 million is tied to go to a five year.
This compares to prior Capex guidance for approximately $65 million with $50 million tried to go to a five G.
It also reflects expected $3 million, an external spin related to our GBP project.
We expect an aggregate free cash flow for 2022, and 2023 combined will be roughly equivalent to the range of $145 million to $175 million, which you provided on our queue two earnings call in August .
Free cash flow for 2023 will be impacted by among other things to go to a five G delay and potentially by the FCC reimbursement program.
Looking further into the future of 2024 free cash flow will reflect ramp spending for our Google GBP project.
Maximum of $35 million in that year as I mentioned.
We continue to expect to generate free cash flow over $200 million beginning in 2025.
We get on the other side of our investments and <unk> five G and G B b.
Longterm grocery elevated by our GBP product.
Or other long term targets remain unchanged.
We reiterate that we expect revenue grew up in a compound annual growth rate of approximately 17% from 2021 through 2026.
G b be expected to contribute to revenue beginning in 2025.
We also continue to expected annual adjusted EBITDA margin to approach 50% in 2026th.
From the low forties in 2022 in 2023.
Strong operating leverage is a hallmark of logos transform business model since the sale of R. C. A business in 2020.
And is the driving assumption behind the growth adjusted EBITDA margin overtime.
We plan to provide updated 2023 and longterm guidance on our fourth quarter earnings call as we typically do.
In conclusion covers business continues to perform extremely well.
Ah raised outlook reflects our strong momentum as we prepare for the commercial launch a Google five G and pursue the development of our global broadband correct.
I would also like to join Oak and thanking our entire team for the continued commitment to go go and to providing Unparallel service to our customers.
Because of you that we are in such a strong competitive position today.
Operator. This concludes our prepared remarks, we're now ready for first place.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
Our first question comes from the line of <unk> with J P. Morgan. Your line is now open.
I gotcha. Thank you.
A couple if I can.
First I guess very I hear your comment about being more careful with liquidity, but how should we think about capital return from here, maybe discuss the black rock.
Share repurchase during the quarter.
And then second Oak made me think about the strategic value of go go as a standalone business versus a potential sale you got a lot of interest a few years ago. His.
His stabilized the outlook is much better how do you think about the value of the company in the market today versus what it could be worse.
Well thank you.
Let me take the first part of your question I guess, two two questions really regarding the catheter insurance from here. So I think we've laid out our priorities for capital returns and starting with with making sure that.
Five G is fully funded right.
Right place on.
Uhm that ravaged ratio, which were in good shape on both of those sturdily is to make sure we have dry powder to execute on Earth.
Strategic initiatives, including good global broadband and there could be some others.
When we were actively consider return of capital Cheryl So we're still proceeding down that.
With those criteria in mind, we have as I mentioned, the cheap or two of those.
Do believe that go has significant cash flow generated capability in the coming years and would expect that resulting in return the capital overtime, but again, we just wanted to be prudent for now as things unfold and as we see the macro environment.
Unfolding over the coming six months or so that will inform what we do but then that's how we're lucky that we recognize it as something that is interested shareholders, including our largest shareholder Sir.
Okay GTC are so it's something with your mind.
On the <unk> on the Black rock question, Yes.
Yes, as some of you are aware Blackrock acquired stock and Gogo exceeding the 4.9% maximum that is provided for in our NOL appointment pill as we call. When we discovered that we with them recognize that they needed to sell down and as they needed to do that it provided an opportunistic.
Paternity for us to to extra you don't share repurchase and and we felt like it was an appropriate thing to do.
Do you think the right message to the market, which is we very much believe in the longterm outlets here at a price of 12 23 at the time, we felt like that was a very good investment and yet it was not such a large amount that it would would dampen the objective that we have to maintain.
So.
So <unk> in your question about valuation I think.
We are very focused on maximizing shareholder value.
Are are bored and I believe that there's tremendous.
Unrealised value in our current stock price, if you will and that is tremendous ruin runway for growth in this business. When you look at the market you know.
30 per cent penetrated today, and we're developing products that will give us the ability to address the global market.
So we're very bullish on the future you know if somebody came along and offered US a price that we felt.
Reflected what we think the opportunity is unsure board would consider that.
But today, we're not actively pursuing a sale or very focused on our strategic initiatives delivering on five G. Delivering on GB and we think that those will will drive a lot of shareholder value in the future.
Thanks, guys.
Our next question comes from the line Ave.
Park with Morgan Stanley . Your line is now open.
Perhaps the morning, everyone.
Hoping you could comment on 2023 or are you still expecting the 15 per cent shipment.
<unk> you talk about last border.
Yeah, <unk>, we still expect to be in that range we have.
The the new.
Use on the five G chipset being pushed back to Ah still living commercially in Q4 is relatively new news.
And so we need will be factoring that into our budgeting for next year. We also have the impact of the.
The F C C Grant program to remove the Z T E equipment, and that's not factored into our unit count projections, yet either so we'll get firm guidance on that and in in our queue for a call that we still expect to be in that range.
Okay, and just start off on the five G R.
Are you coughing.
Confident at this 0.4, Q commercial launches sort of.
R R. As the remaining uncertainty and I think the magenta cause it's such a unit from a backlog without a five G comment are perfect wasn't is that right.
Five G backlog number that you can provide.
Alright.
Now that final question.
I'm sorry go ahead.
Yeah on that on that point.
Those are orders for the five G antennas.
The harnessed for this.
The box it houses the five G chipset.
Card.
And getting the.
The plane fully ready to accept that little box when the five G. Ship is done. So those are those are orders that are five G orders here.
Okay. I'll go ahead with the rest of your question sorry, sorry.
<unk> for five G backlog or is there another number that we should be thinking about from a five G.
Per cycle.
No that's I mean, that'd be the backlog now yeah, but.
But those are the people that are putting.
David had five G done and I, just want to make that clear.
Alright, and then just one last question just.
Sorry.
Alright.
Just on the competitive side, yes, Darling, because obviously come out with a premium product for for for their services. How are you thinking about the impact to your business today and the impact.
To what you would expect for GB over time, and just your competitive positioning.
Plan.
Sure.
Back to the confidence question what happened with the fabrication of this ship was highly unusual and this was a really a Samsung problem was there subcontractor around the test mode of the chimp.
So it's got a lot of attention that Samsung it's got a lot of attention to G. G. G has got a lot of attention span and a lot of tension a cargo and I'd have to say we appreciate.
The additional transparency, we've been able to get from all of those players here since this problem first arose.
So given the high level of attention on this in tremendous focus I'm.
Fairly confident that we're gonna get this chip on time.
You can never say that there can't possibly be a problem that our milestones in every project milestones are called that for a reason, which is you gotta get ask them successfully. So there are a couple of key milestones going forward, but.
At this point I'd say, we're <unk>, we're very confident based on you know just how well the projects being managed and how else going.
On styling.
I almost your victory lap on this we projected this in Q1 2021 on our earnings call. Then we were asked about them and we said look we think that they will come into the market with them somebody that goes after the high end of the market because they're very focused on commercial aviation milk of there'll be designing a relatively large antenna that were to notice.
Markets and would work in the high end of the market and so that's what they've done setup.
Premium price and.
Like they're really going down after competing with the G O satellite providers that it sort of business aviation today.
In terms of our strategy.
We all along I've been more focused on the customer then on starling.
We really appreciate.
Leo Technology Leo.
Constellations can bring to the market. It's a it's a very good type of satellite offering for for B, a because of the fact that you can you can make smaller antennas do the proximity of the satellites to the Earth. So.
We went out.
And decided we were going to try and develop a product that could serve the entire market all segments from white Jets turboprops, all the way on up.
And would be global and so that's what we've done and you know I think.
Our product is physician very differently than Starlink square.
Much smaller antenna then they have.
Which is why it sits on all those aircraft.
At a much lower price point.
They are.
Have.
Part of our models, we have a very high service component to what we do you know if you're.
<unk> on the ground somewhere in Europe connectivity is not working and you know.
The principle is gonna show up in a couple of hours in the pilot's going to get a spiritual chest, we get a guy who there to fix it you know and that's the type of service that customers really appreciate it and we have a broader offering so we have our dashed product or mixed products entertainment products and like so you know we think we're we're we're well position.
I think that there will be.
Some customers in the market that will will go for the the low service kind of self service model that that Sterling cast and so.
So I wouldn't be.
Be surprised if they had some success up in the larger jets.
That said, there's 3000 aircraft out there that don't have anything today, we think our offerings appeal to an awful lot of them. So we think we should be able to to grow <unk>.
Significantly they're finally I'd say, we also have achy G, which is an advantage in the north American market.
The ability to combined atg with Leo satellite presents a lot of tantalizing opportunities.
You can run receive on one and transmit on the other for instance, and do other things that would actually really boost.
Cassidy of the capacity that you deliver so we find that very exciting and.
We feel good about where where possession.
Alright, thanks for a contact sport.
Thank you Thanks Lane.
Our next question comes from the line of Scott Sarah with Roth Capital Partners per line is now open.
Hey, good morning, Thanks for taking the questions. If if I could dive in on the five G front, it's nice to hear that you've got some confidence around the timeline now the third and fourth quarter of next year, but I wanted to to Delvin I think you talked a little bit about F. T seas in line fits on that front I'm wondering if you could dive into that a little bit more.
Terms of development on that front.
What you're also seeing from a competitive landscape standpoint in terms of the delays of five G is it having an impact on demand and then I wanted to clarify I thought there was a comment around some lower revenue related to five G. If I recall correctly I don't think there were big numbers built into 2023 and most of the <unk>.
In general are able to support that upgrade path. So I'm just I just wanted to make sure I understand the comment in terms of what you're seeing out to 2023 at this point because it sounds like you've got pretty good demand I'm not sure. What the coverage is for that 15 per cent growth in twenty-three.
So I think we were talking about S. T C.
Uhm.
That was the first part of your question you have compared competitive landscape as it relates to you know any of the delays or is that is that causing additional problems and then then really kind of your.
Your prior expectations for five G. In 2023, I know of.
Once again is right it's future proof of Gradable. So is that really having any sort of a material impact in terms of how you guys review and it's certainly the second half of 23.
Yeah. So now I'll spell that E. S. D sees me, we have our S. T C N PMA for for five G. Today, we will have to do a minor.
When we get the new chip today that box has a four G <unk> and we'll have to replace that ship with a five G chip that is a.
An amendment that will be.
Not an issue at all.
There's really no change at all so it should not be an issue at the FAA you know we have dealers variety.
Dawn S D C as in installed.
And Russell Wilson, two aircraft and that was done with an S. D. C for that type of aircraft. So we have lots of S. G sees that are.
Waiting for that final.
Five G chip.
Amendment at the last moment, so I think.
We've probably got about 30 plus S. T sees you know.
Either in works are very close to complete and waiting for the five G. Chip. So yeah moving it into production with S. T. C is not going to be anywhere on the critical path in terms of commercial.
Commercial launch.
We don't see any impact on sales today of the delay in terms of competitive.
And roads.
You know that the market's basically.
Just the same as it was a quarter or two ago, what we see that's great is.
An order backlog.
Next year N and dealers are big dealers place there.
Orders for the next year around this time of year and what we've seen so far is a pretty nice growth in those orders besides of those orders silver feeling very good about about that.
The bookings come in a bit later, so we don't know exactly where that will end up so we're reserving judgment there.
Because there would've been some five G orders and that.
The risk is the planes that you Miss.
That went in for maintenance. They go in for a major maintenance advance and would have had five G installed they might they might already have all five in which case, we don't have a sale opportunity or they might just put in L. Five and weight and lower price points five G product on the <unk>.
Side again, you know you get cut in online fit you don't want to Miss that.
And you know potentially you know that that date might impact.
We get cut in certain places so.
Not saying we are but you know these are all things are working with the items and dealers on right now to assess the impact.
Perfect very helpful.
I shouldn't run the impact of the bunch.
2023 revenue.
To think about this there are really two factors to consider one is how many current outside customers upgrade to five G. As we launch in that separately.
So we do expect to see equipment revenue particular impacted by the delay, which we would have seen.
Ramping during 2023, so that will.
Impact the revenue we have accommodated dash in the combined guidance that we've given on castle.
20 423.
On balance you would expect it to continue to be the most widely widespread in salt on it.
Partners and so we don't expect a drop off in sales in the near term to the five G launch an L. Five will continue to be the best option for many customers flavors.
<unk> connectivity the option to upgrade the oak talked about and so on.
But over time, we saw this certainly ramping but but even by the end of our planning horizon that we saw five G. On the order of 20 per cent of minutes online.
So so it's a very attractive product but.
Great and very helpful.
Mhm.
And lastly, if I could just to follow up on the roof and replaced program I know a portion of it about a third has been approved by the SEC I'm not sure what could you update us on the timeline of one you would expect to hear back on the additional allocation and and it seems this.
This is more of an upside opportunity than anything else I, just wanted to clarify how that swings or impact your ex or otherwise capex in terms of if tscc approves.
The additional $3 billion to go to the river replace program. Thanks.
So I'll I'll address the the timing questions and all that and I'll, let Barry.
Hard part, which is the impact on the accounting next year [laughter]. So.
Be clear the S E C has.
Approved us for the 330, some odd million dollars. The F. C. C program is underfunded as the issue. They were they had projected a billion nine in total branch when the Bill was first going to Congress.
The applications that came in significantly exceeded that they cut it lots of them back because parts of them didn't qualify but even after cutting them back the 1.9 billion only reflected 39% of the total number of approved grants so they've.
They've been working with Congress. There are two bills in Congress ended up being very similar to Senate Bill in the House Bill was approved by the House Senate bills and.
In committee.
There was broad bipartisan support for the Bill and you know there are letters written by I think 36 Senators.
Find a ladder for instance, a name it was an unlikely.
<unk>, Chuck Schumer and Tech crew signing the same letters kind of unusual right. So there's broad support for the bill which is good.
But you know that this congress and when the New Congress comes in in January 3rd.
And you know if it's not passed by then it would be a do over.
So if we are very hopeful that it will be address then.
By then and I think it.
Probably well, but this is congress so it's very hard to predict exactly what will happen.
Well divert their attention so.
<unk>, it's hard to predict.
And then the financial impact Scott.
It will certainly be a net cash flow benefit to go go.
Funds are allocated if those higher levels as you know the initiative to remove C. T equipment was always in our long term strategic plan, but it was under a much longer timetable expanded well beyond 2646.
So those costs were originally captured as part of our ongoing maintenance Capex split across those years and the purpose of the program of courses to accelerate that time in Chinese equipment. So.
As that happens we would be reimbursed for that so it's too early to talk about a real castle impact of that that is in general terms kind of puts and takes or is it that we would probably have to make some investment upfront and inventory and so on.
And then we would get reimbursed for that later, so it could be <unk>.
But on balance it's gonna be a positive.
Will certainly provide that more detailed almac isn't with that.
Levels.
Great. Thanks, so much nice quarter.
Yeah.
Our next question comes from the line of Louie Depalma with William Blair. Your line is now open.
Okay Louie.
Barry Jessica and and well good morning.
Alright.
<unk> fair Oak, what is the timing for aircraft flying with the new N B 13.
Combo, the four G five G antenna.
Well, there's one flying today with the envy 13 antenna and it Uhm Russell Wilson aircraft came down to the N B double a convention fully fitted with the five G system.
Minus a five G chip [laughter] and so.
<unk>.
So any I'm, sorry dealers or installing.
<unk> sets out there right now, which dealers or installing minus the small box that holds the the five G aircard with the five G chip on it.
Great that's exactly what I was looking for and my My next question.
Where should we expect the Avon.
<unk> too.
<unk> and are there a significant number of.
Classic customers that are satisfied with their existing performing such that.
And they probably won't upgrade to.
The Avon system.
Oh, that's great.
Great question and the you know the.
Answer as there are today.
Today, we are about 45 per cent of our install basis advance and 55% is still classic.
We see steady migration, but there are they're all our customers that are happy with what they've got with the classic product, but when you're gonna see an upgrade there is when they go to sell that aircraft.
Uhm is generally people. These days have to solve a better connectivity set service to sell the aircraft or the new owner will put it in that.
Improved system.
So perhaps turnover every seven years, roughly and so there's certainly something that can be the classic products for quite awhile.
Gotcha and one final one.
This can be fair.
Any of your F.
If you are.
Sell side analysts such as myself or even a <unk> how many aircraft would you project for the industry at the end of 2024.
Would be live with Ah Leo broadband satellite product for the business aviation industry.
Yeah, that's a great question Marie.
It's not gonna be hundreds, it's gonna be probably under 100 by that but I think it'd be ramping up rapidly the next year.
Yeah, and that's the reason I'm asking is in.
And your comments you were talking about how you see.
They're being demand for for the styling service is there there probably will be and I was just wondering what your expectations are for for that and potentially others that may come.
After Star Lankan.
How that fits into your your locked monitoring plan.
Yeah, I mean, I don't I I I'm not sure quite a exactly correctly I I said I think that they are bottle might be appealing to some some customers who do it yourself offers.
You can go on our website you can reserve the system you don't know when you're gonna get it and there's no S D C as yet.
You know they say, they're working on a bunch of S. D. Six.
And then you you know you gotta find an installer check Claire if they're gonna have an installation manual I mean, there's just so many things you don't know yet what Scarlett doing that it's kind of hard to predict I think that.
<unk>.
It's competing with a G O satellite product, it's very very expensive.
At a price point, that's right around the same as the G O.
And it's gonna provide a significantly better service in the jail.
So you know I think that there are gonna be <unk>.
Plenty of money who are gonna.
Alright go for that.
And would install it you know the question is when and it's very hard to get on these jets the timing of.
Doing something like that the big and Turner I mean, it's a really big into and it has.
Some challenges it's it's.
You know it it it has it has this mount.
Mounting plate, that's quite high and he's gonna retire decompression and things like that there's a lot of complexities and what they've done.
That we're not running into based on our design, but.
You know that all can be overcome.
But you know to me it means it's gonna have to be installed in a major maintenance event and that happens every three years I'd say the big aircraft. So.
You know you don't get out of that often [laughter].
If anybody's got an order it they're gonna make sure there's an S. D C for what they're doing et cetera. So it's gonna take some time and.
And it remains to be seen you know how their competitors will react in Marseille by us. After you activate stylings doing so that's all very hard to predict I would say right now.
The G O satellites, there about 1600 roughly aircraft in the world that have a G O satellites product Adam.
And now that's been available for a long time so.
Not sure that this is cutting so much new ground that there's all new segment out there that all of a sudden you're gonna want satellite, it's probably gonna replace G. O I would think in most instances.
You know, it's a very different.
Set up the G O satellite products are up in the tale. This is gonna be a mounted on the fuselage.
And it's it's a pretty large items on it.
So I want to be seen there, it's nothing nothing's gonna happen Lightning fast there's a great.
Okay, Great Man Duncan.
Duncan Aviation, Hawaii quote often on there she says business aviation with things go to slow down.
Thanks.
<unk> very eloquent.
[laughter].
Sorry.
Our next question comes from the line of Rick Prentice with Raymond James.
A line is now open.
Alright.
Everyone.
Jesse looking forward to hearing more from you in the future and early twenty-three, but very do we get you one more time.
Well I'll still be here through the through the the call. So we'll have to decide whether justice spokesman right alright.
The around through that.
Yeah.
Let me get those caves out there too right.
Question, followed up on some of the other questions.
The 17% longterm revenue category.
What's the split between like units sold driving product revenue versus ARPA, increasing with a different service plans out there. It was that changed at all given the chip delays.
Yeah, I don't think the triple a really <unk>.
Mix Records, you look out there to break it down a little bit so we'd had 15% compound annual growth rate and our motto prior to and then also would you be.
Added the two points additional when you saw that with those sales beginning in 2025, the lion's share of the split is coming from a person gets online about 32% of that is from you know the balances from <unk>. So it really is driving more penetration any of this online as you know that's where the opportunity this market.
Overall, being just 30 per cent penetration and on the <unk> side.
Yeah.
Going up for a couple of reasons and then you did for one reason that you're expected to go up as people will take.
Higher day rate plans, which they're interested in to have a more living room like experience secondly, as we add five G. M. N G V V that will drive.
Right.
The meeting influence on that will be as we get down into the.
The general aviation market a bit worse, if you don't have as high art, but frankly, what matters ultimately as.
Is the revenue per megabyte and that those are still very attractive.
So those are the kind of <unk>.
Alright, I appreciate the color on the on the interest rate potential for mid twenty-three sounded like 13 million additional interest 37 million goes to 59 I assume it's for a happier impact. So obviously a full your impact would be.
More than that is that factoring into it feels quite so long to return on capital or are you going to be watching is is the calculus at some point I think you mentioned that your internet, maybe there is pay down or by down that that's a better accretive values of three casually pre casual for sure how should we think about the timing as you look at that.
Yeah, just to clarify the point about the 13th Amendment dollar increase that's an annual cash interest expense that is between now that is the 2026. So it goes from the 37 million today to 50 million based on the forward curve as of October . So that's really the impact of that one.
Return on interest rates, so just to make sure we're talking about a year.
That's an annual effect in other happier effect.
That's correct Yeah, that's an annual effect in 2026, Sir based on October right and then go ahead sorry.
Does that answer that part of the question.
But can you kind of a couch with as far as how you look at buying down to Earth.
Yeah.
That's the attack in 2026, correct, yeah, Yeah definitely make the ninth 2023, okay.
And then the impact of.
On all of a sudden kind of our thoughts about.
You know it doesn't for me if we were in a low interest rate environment, we would be having different conversations taking that a little bit differently. So so yeah, we tend to be pretty conservative as you know.
There is a more interest rate exposure again, we think it's pretty managed with the interest rate caps for example step down from $650 million to.
$525 million is the next step down so.
Happens in 24, seven so they do step down over time, and so there's that exposure, but we're just gonna keep some dry powder for this as well as for the other things that you might do opportunistically, it's great to be able to have that flexibility for the show by back in September .
So yes. It does it does influences, but over the long term I think the cash generation capability that business is such that a.
Swamp out those interest rate issues because of <unk>.
For cash.
Since last one for me kind of alluded to it there we talked about potential for other strategic initiatives keep dry powder for global broadband and there could be others. It was mentioned and some other places that there could be some other strategic initiatives.
Probably can't tell us a lot of what those are but conceptually high level, what would make sense philosophically.
Say might be interesting to bolt onto the to go go.
Go to market kind of offers.
Yeah I mean.
We.
We've always said they will always look for ways to improve the performance are a T. G network, we think that a large part of the market will will stay on a T. G for a long time, we have good economics, there and of course, we make.
Make improvements in terms of capacity and what we're delivering there uhm that will prolong that like so I'd say, they're mostly in that arena.
We do look at other opportunities in terms of.
Bolt ons or other types of things.
Don't have anything in mind right now so I'm not gonna get out on a limb on that one but I think the main focus would be improving a T. G.
Is there any need for more spectrum does that something that might be looked at as well.
Well you know spectrum is something I never talk about because you know it only leads to trouble so.
Alright, I'll delicately Dodge that question [laughter].
[laughter].
You'll get one yes.
Yeah right yeah.
[laughter].
Alright, Thanks, everybody just look forward to hearing you on to the next song.
Alright, thanks for any strict.
That concludes today's question and answer session I'd like to turn the call back to will Davis for closing remarks.
Hello, everybody that concludes our third quarter earnings call. Thank you for your participation and we look forward to speaking next corner.
You might not disconnect.
The conference will begin shortly to raise your hand during <unk> you can dial star one one.
[music].