Q4 2022 Gogo Inc Earnings Call
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Thank you for standing by and welcome to the Gogo as fourth quarter 2022 earnings Conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your telephone.
Today's call is being recorded I would now.
The conference your host Mr will Davis, Vice President of Investor Relations. Please go ahead.
Thank you Valerie and good morning, everyone.
Welcome to <unk> fourth quarter 2022 earnings conference call. Joining me today to talk about our results are a great Thorn chairman and CEO , Barry Rowan Executive Vice President and CFO , and Jesse Benjamin who will assume the role of CFO .
March 11 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.
Performance of the company.
You need 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 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 that the date of this conference call is February 28, 2023 any forward looking statements that we make today are based on assumptions as of this date.
Undertakes 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 fourth quarter earnings release.
This call is being broadcast on the Internet and available on the Investor Relations website at IR Dot Gogo, Eric 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.
Now my great pleasure to turn the call over to locally.
Thanks Bill.
Good morning, everyone. Thanks for joining us.
Our 2022 fourth quarter capped off a great year for Gogo.
Fueling our growth expectations and positioning ourselves for continued long term growth and value creation.
Our industry is in seismic shifts in demand coming out of Covid. Thanks to our talented global team and strong operating infrastructure Douglas stood atop the avionics electronics industry and its ability to scale and meet that demand.
We expect those demand drivers to continue.
And we'll continue investing in improving our products and services to meet that demand and maintain a leading position in the business aviation in flight connectivity industry.
As I mentioned 2022 was a very busy year.
Together, the Gogo team achieved a lot.
We reached the one 5 billion slight milestone advanced platform.
Launched in 2017, cementing its position as the most successful broadband product launch ever in business aviation.
We completed the multiyear simplification of our capital structure and reduced our net leverage ratio to below our target of four times in connection with the conversion of our final outstanding notes.
With net leverage of approximately three one times at year end and the ample cash on the balance sheet, we are well positioned to execute on strategic initiatives that will ensure our long term competitiveness.
We are definitely manage supply chain and a year of strong demand and weak supply.
And many dealers tell us we were the only avionics company able to meet their demand last year, we shipped more than 1300 total atg units, an all time record up more than 50% from 2021 and more than 20% above our initial guidance.
All of which we believe will drive a record increase in aircraft online in 2023.
We completed the 150 tower build for our <unk> network and we're on track for a fourth quarter launch and.
As I'll discuss later our customers are excited and hungry to upgrade you did thanks level service and we're actively selling shipping and installing <unk> equipment.
We have partnerships with Ludwig and used to deliver the world's first low earth orbit local broadband product size to fit on all aircraft.
This initiative will take us from serving single digit megabits per second today to delivering hundreds of Megabits per second for the high performance segment of the VA market over the next few years.
We did that by aiming to build a much smaller tenant and competitive Leo and Geo satellite providers.
We aim to be the disrupt or not to disrupt in the rapidly evolving satellite IFC space.
And finally not to be overlooked we continued our strong track record of financial performance. We raised our fiscal 2022 financial guidance every quarter and ultimately delivered record performance at the high end or above those rates expectations.
While we're happy with our progress thus far far far more important to focus on our future.
The 2023 financial guidance.
Long term target for Jacky will cover demonstrating confidence in our business and in our value creation opportunities.
So I'll focus the rest of my remarks on two areas first with some key highlights and market drivers of <unk> strong fourth quarter results and.
And second an update on our strategic thinking and progress against our strategic initiatives.
Well, let's start with our Q4 performance.
We ended the year on a high note, we delivered record fourth quarter revenue of $108 2 million up nearly 17% over the prior year fueled by record service revenue a record equipment revenue.
We added 158, new service revenue producing advanced units and ended the year with 45, 47% of our fleet of events.
Adding additional advanced units online is central to our growth strategy.
First it drives incurring high margin service revenue.
It extends customer lifetimes by offering upgrades to new technologies like <unk> and GBP that are easier and cheaper to execute then moving to competitors' solutions.
As I mentioned.
Shipped a record 390 <unk> units in the quarter and we anticipate those will help drive record Activations in 2023.
On the bottom line.
Both delivered record fourth quarter, adjusted EBITDA of $46 2 million up 17% year over year, driven predominantly by growth from service and equipment revenue.
We're really pleased that we can deliver that kind of bottom line performance, even as we invest in strategic initiatives like <unk> and <unk>.
We believe the strong demand we're seeing as a result of a structural change in VA passenger demand.
Evidenced by Google flight counts being up 31% for the quarter when compared to pre Covid Q4 2019.
That change is driven by a number of factors, including a large cohort of Flyers that tried private aviation during COVID-19 and trying to keep funding private aviation.
Shift in passenger demographics to gens X y and Z to demand connectivity when traveling.
The digital transformation all passengers lived their lives whether that's our social lives of work lies ways to drive demand for more high bandwidth applications.
The impact of that digital transformation as evidenced gobo data consumption.
<unk> per passenger hours grew 17% year over year in the fourth quarter and was up 50% from 2019 for full year.
One recent trend of note is the return of corporate flight department activity with <unk>.
Part 91 owners, which represent 59% above our aircrafts online slide 23% more flight 2022, and in pre Covid 2019, and using 46% more data per hour than they did in 2019.
As a result of all this activity, we saw significant demand pull across our distribution channels.
Both our dealer and OEM partners have told us they kind of installed more aircrafts if.
If it were not for shortages in labor and or parts from their other suppliers.
We saw a big surge in shipments in Q3 to Q4, and especially December as partners placed large orders to be the January one price increase.
As we look at our inventory in the field, we see shipments to channel inventory levels that are consistent with prior years.
Specifically what are the largest stockpiles are at our largest Oems and dealers who choose through those inventories fairly quick.
As we look ahead.
Expect a return to more normal pre COVID-19 order patterns.
Lead times are down to three months and we felt that that's tougher stock that we can easily handle drop in orders.
And from a supply perspective, we've got clear line of sight to meet almost all component demand for 2023, and our current backlog is sitting at about 50% of our equipment budget.
That said, we had a very strong December which has led to January and February being a little lighter than planned.
However March orders are back on track and we expect to return to more normal high volumes for the rest of the year.
Now, let me turn to our current strategic thinking and an update on our major strategic initiatives.
Is it supply chain environment has stabilized in recent months, we've now turned our attention to better understanding why 70% of North American and 95% of rest of world aircraft have no broadband connectivity.
As examples of some of the cost of install others quality card solutions for others.
There is no broadband solution that sits on their aircraft there are many other inhibitors as well.
We're taking a systematic approach to tackling those inhibitors to accelerate our growth with the following three pronged strategy.
First <unk>.
Spanning our service addressable market by bundling, our products and different configurations to appeal to all segments of the market based on variables like size of aircraft, whether they fly in North America over the rest of the world whether they want to pay more for high performance from that sort of a value oriented product and whether they fly corporate mission.
<unk> admissions or some others.
Given our choice of networks, Lee, our atg and our various advanced equipment form factors from the performance oriented <unk> five to the value oriented FCS. We believe we can put the different combinations of equipment service and networks to fit the needs of every segment of the global market.
Second we want to continue to extend the service revenue life of Gogo equipment installed on an aircraft by.
By continuing to drive advanced penetration.
By enhancing the performance of our Atg network to serve the North American midsize and light jet value oriented segments of the market.
And by providing easy upgrade path to new technologies for advanced customers that are cheaper than replacing our equipment with competitive products.
And third we want to provide equivalent or better network performance and superior customer service to each segment of the VA market at a lower total cost of ownership than our competition.
Beyond our <unk> and GBP initiatives, we've launched a series of smaller operating initiatives to invest many of the inhibitors I described a moment ago.
Such as accelerating install times further improving our award winning customer service and developing product pricing and packaging to appeal to each segment of the market.
These operating initiatives modestly to expense in 2023, and 24, but will help accelerate top line growth and a step function change in free cash flow in 2025 and beyond.
We believe our focus on these areas will build an EBIT more competitive gogo better positioned to capture a large portion of the global business aircraft market and creating more value for customers and for our shareholders.
Now, let me turn to updates on our major strategic initiatives <unk> and GBP.
Initiatives that will take us from delivering single digit megabits per second today to tens and hundreds of Megabits per second over the next few years.
I'll start with <unk>.
As I mentioned earlier, we're now on track to commercially launch <unk> in the fourth quarter of this year.
December the chip passed critical design review, a collaborative effort and much intense scrutiny was applied and transparency exhibited across all parties working on this chip, including Samsung GTT airspace and ourselves.
The chip is now deep into fabrication and it's allowed them to be delivered to us on time to our Q4 target.
What are.
Our <unk> network is expected to deliver speeds roughly 5% to 10 times faster than <unk> current atg networks.
With peak speeds up to 30 times faster.
Having multiple streaming sessions and video conference applications to be opened at the same time on the same aircraft and all at a lower cost than competing Leo and Geo satellite solutions.
In the meantime, customers, who want Gogo <unk> service can install the advanced Delphi system today with 40, <unk> provision and operate on Gogo forging network until three the box with a chip is available.
For those who pre provision <unk> III is ready it can be solved quickly and <unk> service can begin immediately saving downtime and expense.
To date, we've delivered 24 pre provision chipsets to customers.
105 in customers that have signed up for pre provisioning promotions and we have 92 orders for dealers.
Some of the dealer orders may be duplicative of customer orders, but regardless that is a big jump from the 60 orders we had on our Q3 call.
We also have commenced from four Oems and.
Discussions with several other Oems about quarters, and we have certifications and process for 19 aircraft models, representing more than 7000 aircraft in the U S fleet and we expect further certification announcement announcements and incremental momentum with our partners in the coming months.
Now I'll turn to TBB.
First a reminder of why chief of blindly yield.
Leo satellites are particularly well suited to business aviation because of their low altitude, which enables an equivalent link budget was less power the geo satellites, thereby enabling smaller integrity, which can fit better into the small spaces available for intended installation on those aircraft.
Over the next few years, we expect Leo satellite technology will allow us to launch service plans that deliver hundreds of megabits per second to meet demand from the high performance in heavy Intercontinental jet segments of the market.
Our goal for the global broadband offering or to one expand our total addressable market to include the 14000 business aircraft registered outside of North America.
To add a satellite feature for the hundreds of U S. Supermini heavy jet to fly global emissions, but have gogo advance ATT installed for use of in North America.
And third drive enhanced stickiness in our core North American medium size and smaller aircraft segments by offering an easy upgrade path to a real product if there needs to pass, but atg alone can deliver.
GDP will enable streaming directly from your favorite AUO services multiple simultaneous video conferencing sessions VPN access and all the other connectivity enabled solutions you've used today at the same server probably do you expect in your office or living with today.
We can then we continue to make great progress alongside our partners.
<unk>, who will supply the dealer network will complete launch of its 588 that like global constellation in April .
Have the network deployed an arrow ready in 2024 and assembling their pending merger of equals that closes should have access to funding for their gen. Two network, which will further improve our <unk> performance.
On the antenna side, we've just completed preliminary design review with our partner Hughes and had been able to move our schedule to the left by two months and now aim to launch commercially in the second half of 2024.
Our <unk> product has received a very enthusiastic response from our Oems dealers and partners and fleet managers.
As we've gotten more clarity at the plan and competitive plan.
It's clear that we're building, but what we're building is disruptive and highly differentiated on two key factors.
Firstly.
A small form factor antenna is designed to work on all sides of aircrafts.
While our only real competitor has delivered a large antenna that will work best and they already very competitive heavy business jet segment of the market.
And second.
<unk> is focused on value, we believe our pricing will be more competitive than others in this space.
Importantly.
We're well positioned to leverage our existing international customer support footprint to support GBP outside the U S with <unk>.
Thousand plus dealers already in place and 900 narrow band customers in 90 countries today.
Let me wrap up my strategic initiative update by saying that we see atg, <unk> and GBP complementary elements of our product portfolio.
With <unk> targeted to serve value oriented segments of the North American market, where 86% of all flight take place.
At GBP targeted to serve all segments outside North America, and the high performance Super heavy jet segments inside North America.
I should add advanced multi bearer capability will allow us to serve the Super high premium segment of North American aircraft with Leo and Atg connectivity at the same time.
Significantly enhancing capacity and providing redundancy for those owners who want it.
Despite investments in these two very large strategic initiatives and the smaller operational investments I described earlier.
Adding to substantial growth in free cash flow this year.
As these investments roll off we expect step function growth in free cash flow beginning in 2025.
To wrap up.
Our accomplishments throughout 2022 have reshaped gogo.
Got tested Atg company with.
We're driving the next era of IFC technology with the launch of <unk> and development of broadband Leo satellite and the continued penetration of our advanced platform positions us well to extend customer customer lifetimes and drive free cash flow to invest in further strengthening our business and to return capital to shareholders.
In short <unk>.
Our resilient market demand oriented items that are posed poised for value creation than ever and our team is energized and excited to deliver on the opportunity ahead in 2023.
Finally in a moment I will turn the call over to Barry for his last earnings call as <unk> CFO .
But first I want to thank him for his advanced contributions to our company.
Barry has been an invaluable leader during a period of unprecedented change challenge and growth.
He led to numerous refinancing without which we would not have survived he was central to the sale of our commercial aviation business.
He's been a trusted advisor on operational and strategic matters to me since the day I arrived in 2018.
So I wanted to give him my personal thanks as well thanks to the entire Gogo community.
We wish Gerry all the best in his well earned retirement.
So while this Barry.
Fortunate to have a highly qualified successor at ingesting Benjamin who has run FTAA at Gogo for the last six and a half years July credit with making sure we always hit our numbers.
Yes. He's also on the line today and will walk through our 2023 guidance and long term targets as well as be available for questions at the end of our prepared remarks.
There is no doubt our finance organization.
Set up for continued success in <unk> capable hands.
Now I'll turn it over to value for the numbers.
<unk> for your very kind words really appreciate that and good morning, everyone.
We are very pleased with government performance in 2022, as we set new records, both operationally and financially.
Our performance demonstrates two foundational elements to go those investment thesis.
First we have proven our ability to deliver strong financial performance, even as we've undertaken significant strategic investments, including Gogo <unk> and of our global broad patent on it.
Looking ahead, we will continue these investments in 2023, and 2024, and we advanced our technology and execute other operational initiatives to maintain our leadership positions in the growing and Underpenetrated business aviation in flight connectivity market.
We expect our free cash flow to accelerate substantially beginning in 2025 as we get these major projects behind us.
Secondly, our ability to achieve these results is a testament to the strength of our underlying business model and financial position.
In 2020 to be met unprecedented demand for equipment in the face of significant worldwide supply chain challenges.
As these units are activated these aircraft online and produce recurring high margin service revenue that is sticky and is the engine of our strong cash flow.
And further our strong balance sheet provides the flexibility to invest in our business for the long term, while delivering for customers and shareholders today.
With 2023 financial guidance and long term targets, we announced this morning underscore our confidence in the business and our strategy.
Before we discuss these in more detail I'll walk you through our fourth quarter results.
For the fourth quarter, a record total revenue of $108 $2 million grew 17% year over year.
Our top line was driven by record service revenue of $77 3 million up 12% year over year and 3% sequentially.
As we have said increasingly NOL and particularly the penetration of our advanced products is the centerpiece of our strategies in both the North American market and globally as we also further our GBP initiatives.
In the fourth quarter totaled Atg ALLL increased to 6935 units up 8% versus the prior year and 2% versus the prior quarter.
Advanced units online with the 3270 now up 31% year over year and advanced now comprises 47% of our total fleet.
Our dealers are as busy as ever and the proportion of shipments to channel inventory levels. In 2022 was in line with trends for 2019 to into 2021.
As I mentioned, we expect our exceptional equipment shipment performance in 2022 to drive strong Activations and service revenue growth throughout 2023.
Total <unk> grew 2% year over year to $3370 driven by growth in recurring revenue from subscription plans.
We expect higher price data plans and the launch of <unk>, followed by GBP to further expand our RPM growth overtime.
We would expect.
Primary growth driver of service revenue to be from additional aircraft online.
Turning to the equipment side.
Delivered $38 million in equivalent revenue within the fourth quarter.
A 34% increase year over year as we saw continuing very strong demand for our advanced L. Three and five products.
We shipped a record 390 advanced units in the quarter and 1334 for the year, a remarkable 50% year over year growth in advance units shipped.
Okay.
Global delivery service margins of 78% in the fourth quarter.
This was a two percentage point decrease year over year due to the planned higher network costs associated with the deployment of <unk> network.
Okay sequential basis. These operating expenses were 2% lower in the fourth quarter, primarily due to lower legal fees.
We anticipated that 2022 would be an investment year for Gaza.
It was but not to the extent that we originally planned due to pushing out a gogo five G expenses related to the chip Tonight.
But can you had expected 2023, and 2024 will continue to be Invesque years, as a complete our five G program and wrap spending for GBP.
We expect to see the benefit of these investments through sustained strong top line growth and an inflection point in free cash flow growth in 2025 and beyond as we have consistently stated.
Well now described the spending profiles of our global <unk> and GPP initiatives, starting with Google Five G.
As I mentioned <unk> five G. Chip is 19th application and we're on track and on budget for commercial launch in the fourth quarter of 2023.
It's worth noting that we have remained on track with the cost expectations, we set back in 2019.
<unk> external development and deployment costs would be approximately $100 million.
As we detailed in our third quarter call, we push some of <unk> spending previously expected in 2022 into 2023 due to the late in the <unk> chipset availability.
And the fourth quarter of 2022 $6 billion per Glover G primarily in Capex.
The complete impact of accounting shift for five G spending from 2022 to 2023 is reflected in our 2023 financial guidance.
It is particularly evident in our adjusted EBITDA expectations, which reflects both legs five G sales and horrified G spending in this fiscal year.
And I wanted to or GBP initiatives.
And the fourth quarter, we recorded approximately $1 billion appropriated sketches related GBP.
We continue to expect external development cost per GB with less than $50 million over three years.
I'll go get updater expectations on the timing of those costs.
<unk> spends was approximately $4 million in 2022.
We now expect to have a ramp to $14 million in 2023 with most of the remaining spending to occur in 2024.
This is a slight portfolio prior review the timing of our GGP investment.
Additionally, we know anticipate that approximately 95% of gvg external development costs will be in Opex.
The spelling profile is reflective of 2023, adjusted EBITDA and free cash flow guidance.
I'll know touch on a record profitability.
Those records adjusted EBITDA increased 17% year over year to $46 $2 million.
Literally driven by record service and equipment.
We delivered net income of $27.7 million in the fourth quarter translating to 22, and basically for sure and 21 cents and diluted earnings per share.
As a reminder, our financial statements reflect noncash income tax expense as we continue to generate pretax income.
Based on our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period.
But we may have to pay a modest amount by the end of our planning price.
We continue to expect to see additional proposals portion of our remaining valuation allowance against the prototypes assets within the next 12 months.
And the fourth quarter regenerated $25 million for the cash flow down slightly from $25 $70 million from the private year period due.
Due to increased capex associated with five G and increased networking capital.
Now I will turn to a discussion of a balance sheet.
Go home and change that strong liquidity position as we ended the quarter with $175 $3 million in cash and short term investments and $100 million revolver remains undrawn.
And at the end of the fourth quarter, we have $714 million announced probably get on their terminal indeed.
A strong balance sheet provides a foundation with other significant financial and strategic flexibility.
Mmm, we've got to turn the call over to Jessie to provide goodness forward looking perspective, including capital allocation strategy as well as of 2023 outlets and long term targets.
But first I'll provide a quick recap cap of 2022, a full year results.
An increasing demand from customers connectivity and notice robust business model both contributed to every year a great performance.
We generate a total revenue of $404 $1 million up 20% and 2021 and at the high end of our guidance range, which we increased during the year.
We've leveraged service revenue of $296.3 million up 14% from 2020 plan.
Service gross profit also Brian 14%.
Which is a significant contributor to free cash flow.
Equipment revenue was $177 million up a remarkable 42% in 2021.
We reached adjusted EBITDA of $173.8 million facility here.
<unk>, 15% from 2021 and significantly above our guidance range, which we also increased throughout the year.
Net income from continuing operations was $92.1 million for the year.
The decrease versus prior net income from continuing operations like $156 $6 million is primarily driven by the $187 $2 million income tax benefit.
Recorded last year as a result of the partial release of our deferred tax valuation allowance.
We also delivered records free cash flow at 50 $720 million for 2022, even as we invested approximately 40 million five G capex.
Overall 2022 is an outstanding year for government with problems of results. We achieved thanks to the very hard work from our entire team. Thank.
Thank you all for your relentless commitment customer focus and innovation now I'd like to pass the Microgestin.
Thank you Bury it is a pleasure and a privilege.
Jogging this morning, but I think behind the numbers for several years and think games with many of the on the line previously I'm looking forward to getting any better.
Hello.
I'm going to provide a brief update on our capital allocation strategy.
Provide some context to the 2023 guidance and long term targets, we announced this morning.
We are consuming Ah balanced capital allocation strategy intended to further our strategic costs and enhance shareholder value.
We are focused on four priorities first maintaining adequate liquidity.
Investing in strategic opportunities to drive competitive positioning financial value, including Tai Chi and TBB.
Third maintaining an appropriate level above average and finally, returning capital to shareholders as appropriate in the future.
Given the rise in interest rates in the current climate activities at the financial markets. You can see that we are taking a more conservative approach to our balance sheet.
Higher cash reserve provide us with the optionality to evaluate potential new strategic investments and prepare of strategic and financial flexibility.
In addition, we have previously stated our goal of maintaining our target and our progress ratio to those four times.
The end of 2022 within that coverage ratio of $3 one time.
Looking forward, we are planning to maintain that leverage in the range of 2.5 to 3.5 times.
Our strategic considerations also include the potential to pay down debt in the future.
We will continue to evaluate capital returning capital to shareholders in conjunction with our ongoing assessment of financially attractive strategic investments in the context of fluid macroeconomic environment.
Now I will transfer the guidance and long term targets. They announced this morning, starting with some additional color on of 2023 protection.
As a reminder, or guidance and long term targets do not reflect the impact at the Federal Communications Commission secure entrusted communications network reimbursement program as.
As we await further information regarding with a congress of appropriate additional funds for eligible expenditures under this program.
We expect 2023 revenue to be in the range of $440 million to $455 million.
We anticipate that 2023 will be a strong year for aircraft online growth as the record appointment the and it should be shipped in 2022 are activated translating into solid service revenue growth.
Hi, Robert this growth is partially offset by lower five G equipment sales relative to our previous expectations due to the <unk> chipset.
<unk>.
We anticipate 2023 adjusted EBITDA in the range of $150 million to $160 million as.
Barry mentioned earlier.
2023, 40, another important investment near prevailed out, particularly as an increase our investment in GBP and complete a bunch of <unk>.
Our agents that EBITDA expectations, approximately 30 million.
Posted targeted opex investments to drive future growth broken down into three areas.
First $9 million and expected five G spending which reflects the shift of $6 million from 2022 2023 related to the chipped away.
Second an increase in GBP spending to $14 million from a prior expectations of $10 million.
And finally as outlined in his remarks increased investment and additional operational initiatives.
<unk> and penetrating the 70% of the business aviation and play connectivity market that remains intact and maintaining our long term competitiveness.
We expect 2023 free cash flow at 80 million to $90 million, which at the midpoint is nearly 50% growth over 2022, even after reflecting the increased investments I just walk through.
Before cast 2023 cash interest to be approximately $38 million net of the benefit of our interest rate caps and capex in the range of $30 million to $40 million, which includes.
Approximately $20 million a stand for five G.
Looking further into the future or 2024 free cash flow.
The branch external spending for our GBP project.
As we mentioned, we expect to be below $50 million in aggregate.
Now turning to our long term targets.
We recently updated our baseline longterm model, which now reflects the launch a glucose <unk> in late 2023.
Launching or GBP product to penetrate new global markets.
And investment and initiatives to continue to improve our competitive positioning.
Our long term targets are as follows.
We expect revenue growth at a compound annual growth rate of approximately 17% from 2022 through 2027 with global broadband contributing to revenue beginning in 2025.
Updated view maintains or 17% Kmart target for an additional year despite of dropping 2022 during which revenue grew 20% after the first year.
We expect annual adjusted EBITDA margin to be in the mail at 40 per cent range by 2027.
Slightly lower than prior expectation driven by lower equipment margins to find the our strategic initiative of driving advanced penetration.
It also includes investments and engineering design and development to fund continued innovation and market competitiveness in the out years.
Importantly, we still expect to achieve significant operating leverage has received a potential for operating expenses as a percentage of revenue to be reduced by as much as 15 points from 2023 to the end of our planning horizon.
We continue to expect free cash flow of more than $200 million in 2025 and growing in 2026 and beyond.
This expectation is based on similar capital structure assumptions underpinning our previous long term targets.
Importantly, the originally set this target in September of 2021 and have maintained it in spite of since committing to the G. P. B project and operating in a higher interest rate environments.
In conclusion Cougars business continues to perform extremely well.
Our outlook underscores the immense value creation potential for our customers and shareholders that we expect to unlock as we execute our strategy.
Now I'll turn the call up after buried for some closing remarks, but before I do that I just Wanna get buried my heartfelt. Thanks for his guidance and partnership over the years and especially in the last year to ensure a smooth transition.
Thanks, so much Jeffrey.
Before we opened up the call for questions I would like to take this opportunity to express my appreciation to Oak for you are truly exemplary leadership to Jesse for stepping up that you have to well for your partnership with the Street.
<unk> for your incredible support.
As you know I'll be closing a chapter of my professional life in the coming weeks, which is spend 40 years, helping build returning around on technology, driven companies, including nearly six years ago.
And then they returned from <unk>, but I am not retiring from life.
Forward to this next season, which I expect to include serving on boards contributing to the poor and investing in the next generation of leaders.
Google is an outstanding positioned to achieve a significant potential for value creation through enriching our customers lives.
Continuing to contribute to society, along the way.
It's been an absolute privilege to be apart from covers transformation in partnership with our highly innovative and energized key UN.
Truly the best.
I'm also proud to pass the time to Jesse.
With more than demonstrated competence leadership announced standing business acumen three years ago.
Plus she's a wonderful human being.
I look forward to charity achieve open the rest of the leadership team guide drove over to the right future lies ahead.
This concludes our prepared remarks, and we are now ready for our first question.
Thank you again, ladies and gentlemen cause like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one with our first question comes from a lot of Rick Prentice Raymond James Your line is open.
Good morning, everybody.
Alright.
The first area I think our time together spends almost 20 years from all the different places I've covered and you've been out so it's been a true pleasure working with you as well so congrats on the.
X rays of life and Jessie glad to be working with you in the euro your new role as well.
Thank you.
Yep.
You bet.
[laughter] first the first question is [noise].
Oh, if you talked a little bit about competition and how you figure you guys shape up vs.
Others that might be up there now and in the future how should we think about what the with.
With the twenty-three guidance in the long term guidance assumes as far as competition from whether it's leos or air to ground or other G. O type people, what's kind of baked into that and it sounds like you wanna be available to be very competitive prices with how do we think about health competition is factored into this guidance.
Yeah.
So.
I think.
Now starlink.
Entered the market at the high end I would say that it came in with a large and Turner.
Competing with G O satellite providers.
The heavy gestured segment of the market.
At a pretty big a price that is competitive with <unk>.
Other than our pricing.
The I think this is going to be huge changes.
In the competitive landscape over the next couple of years by virtue of the Leo entry.
And of course, we hope to be a driver that address abrupt turn on or disrupt D.
And I think that's going to have a pretty significant impact on G O providers. So.
About perspective.
We see ourselves.
Accelerating revenue growth with the launch of the GBP products.
Now in 2004.
Accelerating revenue growth of five G studying and.
The revenue growth DVD review 25 on that new growth from five G would be 24 on.
And so we think we compete very very effectively in terms of Kadima starlink.
Their their product is installed on some aircraft we've talked to people.
And.
Understand with their speeds are banks.
They are speeds CVV will be very.
Very competitive with those speeds and there'll be increasing their speed over time and will be increasing our speeds over time, it's one word launches gentoo and and we progress that partnership. So we thank god on a product quality.
To your basis for a competitive and then when you look at all the other things that come into bear in terms of but it takes aware that the visit aviation market. We think we have a real advantage.
Just have our customer services hugely important in our business.
Embraces engineering support billing support to everything and people expect.
Very high levels of alcohol White glove service in our industry, they're very good at that we can afford to spend a lotta money, serving our market because of our scale and the vertical market we have.
Part of the largest share of the market and we generate a lot of cash flow of out of the market, which enables us to invest in all the different elements of sales and marketing support engineering et cetera that it takes to really understand and deeply.
Integrate ourselves into da Marcus.
Markets. So we feel is a big advantage. There we have 30 years of building very deep relationships with all the <unk>, we have contracts with <unk>, which are hard to do [laughter]. We have 120 dealers and very deep relationships. They are deep relationships of the big fleet operators and with thousands.
The owner operators.
So I think we see that.
We can be very very competitive and.
Retail got and we factored all those factors that I've mentioned, among the government and the web plan.
Great [noise].
Specific to the.
The initiatives should we assume that most of the GB be spending goes into E. D D and that the operational initiatives also go into kind of a edd lines.
Yeah. So most of that spending as we mentioned the TBB now, 95%, it's going to be opex from that will be all <unk>.
Oh, sorry, all in Edd, and yes, but the operational initiatives as well as predominantly in eating.
Okay.
[noise] final question any update on the lawsuit what's going on.
On the patties and the.
Court case, although we celebrate came in lower cost and you saw it in the corner maybe.
Yeah sure, there's a lot of blood to update their.
So first of all I just want to repeat do not infringe on these patents and I wanted to be very clear about that and I'm also not going to comment on him.
Litigation strategy or the case itself.
As I don't want to obtain our litigation, but let me just go through where things stand.
So small sky originally filed a patent suit against us about four patents.
They they.
They've just added that just.
Filed with the court requesting to add to the new paths.
Those two new patents.
Essentially additive to existing families of patterns.
That were already part of the suit.
So <unk>.
<unk> six patents at all right now I believe in three of those patents expire in August of 2025, and the other three and expire in 2034 and 2035.
There are two problems with the litigation right now one is the original infringement complaint.
And the other is that the request for a temporary injunction and I'll just covered with each of them.
The infringement on the one side of the injunction.
Application.
The judge at the at the.
The presiding judge over the main trial decided against a smart guy on that and did not grand a temporary injunction David appeal that that's in the Federal District Court and that court.
Can either.
Essentially remand the case back to the original judge.
Saying that there was an abuse of discretion, which would be the standards that they'd have to apply in the district and then the the original judgment.
We have to deal with that and neither.
Changes mine or or confirm.
His original denial.
If the district court did not find that there was an abuse of discretion than the ruling against smart sky on a temporary injunction stand.
The original case.
The.
The presiding judge is now scheduled trial for April 25.
And like I said before I do not believe we do not believe we infringe.
But.
Be clear.
If.
The judge ultimately found in favor of Smudged Sky.
The overwhelming.
Remedy is that there would be some sort of licensing agreement.
<unk> certainly.
Tried to differ in their pricing Elise there can be a permanent injunction against us to prevent us from selling.
Selling our five G product that would be highly unusual.
And I would also note that.
The patents that are expiring of course any decision by the court.
A fairly limited in terms of what the fees might be because.
Those patents will not be around very long after the case since the trials April 25, and had passed expire in August of 25.
And.
Let's see.
I think that's about it.
Any follow up on that right.
Nope I think that's clear it will just keep our eyes on it.
Have a good time look forward to see Jess.
And very down for one final Swansong in Orlando next week would say well.
Looking forward to it sounds great Yeah, we've managed to keep.
Barry hung on adult for two way to look at it.
Your confidence.
I didn't know that [laughter].
[laughter] sorry about that.
[laughter].
It'll be a pleasure [laughter].
Well.
Thank you one moment please.
Our next question comes from the line of Scott <unk> I've Rots. Your line is open.
Hey, good morning, Thanks for taking my questions. Congrats on the quarter Perry I'd like to add my congratulations to the best of luck going forward in your new endeavors and Jesse <unk>.
Congrats I look forward to working with you going forward.
Okay. So my escape.
Maybe maybe the dive in on the guidance for this year right. We've got some elevated opex as a result of five G. P.
Pushing now from 22 into twenty-three on top of that the investment cycle for G. B B going up this year I was wondering if you could extrapolate that into 24 right five G should start to come down, but I think the GBP cycle continues to increase a little bit how we should be thinking about that and also in terms of the guidance for sure I Wonder if you could clarify how you're thinking about.
Equipment gross margins I think you've talked about possibly being in a little bit more aggressive if need be we're gross margins could be under 30 per cent. What are you guys. Just kinda factoring in at the current time and that that guidance.
Yeah, that's right. So for 2024 Uhm as you mentioned 23 and 2024, our investment nearest for US. So we will have the remaining expand it's going to be in around the $30 million to $35 million for two I mean extended GBP in 2024, and that's predominantly opex.
We will you know that's gonna get upset as we see some of the 2000 22022 shipments.
Coming online and twenty-three and will continue to be providing service revenue in 2024, but it's still there will be an investment here.
With regards to the equipment margins that's right. So you notice either our long term targets for the adjusted EBITDA, They come down slightly and part of that is reflecting the.
Lower equipment margins to be able to be able to grow our units online and support the advanced penetration strategy that we have also included as part of that is considered spending and <unk>. So that we can remain competitive in the hundred years of our being cautious.
That and being able to keep that level of innovation going forward.
I might just add that.
On the average sales price.
To remind people, we've often talked about going down market as well as the market.
This phone.
Call. Our segmentation strategy here is also going down market and penetrating down market and as you go down market the markets.
<unk> sensitive themselves.
Factored in some increased promotions or some price reductions on.
What I'll call more value oriented advance.
Form factors.
Margaret.
Gotcha.
As if I Miss this on the call, but did you give a unit number that you're targeting in 2023, and then lastly, if I could on the ARPA front, you've done pretty well on that front I think over the course of 22, it's gone up a lot of moving parts rights moving down market plus you've got more unlimited plans in your five G kind of coming in to the back.
This year given the current backdrop, if I look at some of the data in North America utilization is flat to be down a little bit still underpenetrated, Richard growing overall units and connected aircraft, but utilization is going down a little bit I'm wondering is that having any near term impact on <unk> in terms of how.
Have you seen for utilization or our customers moving towards higher end plans and how do you expect five G to impact that as we start to get into the back of this year and as of 2024. Thanks.
Buy you a <unk>.
You mean, the aircraft utilization not network utilization, but Ah network utilization is way up aircraft utilization and frankly I think.
<unk> put the aircraft is up slightly.
But but yeah, the trend and serve a leveling off and then toss that looks just like kind of a plateau the demand for lift but that demand is still way over where it was in 2019 and and that's the structural changes in the industry, that's driving IFC demand.
Cause you know 70 per cent of their planes don't have anything and the people buying those aircraft demand now for ISC given all the changes I talked about my script in terms of the demographics.
The applications people are using et cetera.
In terms of.
The impact on us up a slight decrease in flight counts industrywide really not much impact and Thats for that same reason, there's just so much of this market the tongue penetrated and there's demand in that large and penetrated portion of the market. So we don't see any impact there I would say.
It it's.
But if not a major driver of our growth you'd accounts are the main driver.
And like you said Scott.
Five G will push things up a bit going down market.
Feels like we have a serious and others will pull it down a little bit that ultimately GBP will push it up a bit. So you know all these things are going to play out and that's why we don't project very large ARPA growth through the planting site.
Great. Thank you.
Thank you Scott.
One moment plants.
Our next question comes from a lot of laughs Mccarver counting your line is open.
Hi, it's lance photons, calling him thanks very much for the for the information thus far Barry Congratulations it's been a pleasure working with you and Jessie I look forward.
To working with you as well I wanted to sort of focus on the long term targets. The the the revenue and free cash flow target since you've introduced these longer term targets had been consistent fairly consistent thankfully, but EBITDA margin targets seems to be bouncing around a bit.
I think first it was 45% in 2025, and then I think it was approaching 50 per cent by 2026 and now it's down to 45% by 2027 I think so I'm. Just wondering if you can comment just sort of high level, what's going on there and it should we expect this target.
In particular could remain volatile and then I have a follow up as well thanks.
I don't really view bouncing between 45, and 50% as being extremely volatile.
Approaching 70, I should point out is Jesse says.
Yeah, We did guide, but that you know so 48 that was approaching 50 now maybe we're just below 47.
5% range, so, but we think those are all very healthy EBITDA vitamins to begin with.
Second of all I think there are two things over the course of the LTM that are impacting that first is what I just mentioned around the average sales price on equipment.
We have been introducing smaller phone factors that go down market.
Those be priced at lower prices and there'll be competitive because one of the guys penetration down there with the advanced platform.
So that's a.
A bit of a drag on equipment marching in the out years, so that brought things down and then frankly, we it's very hard to predict exactly what's going to happen in the competitive environment, we talked about it.
Obviously stylings entered at the high end of the market, we don't see a lot of progress there, but they have entered and.
The way, we thought about that as we may need to invest more in engineering in the out years.
So a big beefed up our <unk>, we don't have named projects for some of that spend right now, but this is kind of a placeholder to manage.
Vacation so that's the other driver.
To ask you that it just happened that though we want to make sure. They understand that we are planning to have significant operating leverage.
Because our operating expenses a percentage of revenue, we're expecting that to decline approximately 15 points from 2023.
And also and we really want to focus on the absolute EBITA generation had not just on the margin.
No date, and we've been pointing out we've been very consistent anchoring around more than 20 200 million and free cash flow target upset over two years ago and so when you look at that and then also over the latter years of our planning period.
The.
The free cashflow conversions.
Approaching almost 90% so.
And that actually ties into my follow up which is just trying to get a better sense for what might be happening below the EBITDA line given that there has been a little bit of a of a reset on the EBITDA margin and yet the free cash flow.
Has been holding and firm so is that I mean, I can't imagine that it's it's interest expense, but perhaps you're seeing some advantage. Some some better performance in terms of cash taxes Capex are working capital.
Yes, we have nowadays with our net operating loss balance that we have we don't expect it you know paying meaningful cash taxes until the end of our planning period.
But I'm also with regards to our Capex. So after after this year.
Really going to see a decline in that Capex and that's why you're going to have that type of high turnover rate to free cash flow in 2025 really have that stopped functioning then going forward.
Alright, and we also have cash projects opex right now than than Capex.
Thanks very much.
Thank you one moment please.
Our next question comes from the line of land and Park I've been match. Your line is open.
Alright. Thank you very much for taking my questions congratulations to Jesse and that's where she was on my retirement Barry.
I just wanted to follow up on the on the long term revenue guidance.
I was just wondering if you could just aggregate back between service and equipment for us and.
To better understand what.
How how those two elements are playing into it and I just had a couple of follow ups on.
On the back of that.
Some of the revenue mix.
Service revenue [laughter], so equipment as a means to service revenue back but that it is.
Eight years items.
Exactly I don't Wanna be.
Yeah, we haven't decided that.
It's mainly it's being Kevin, but you're gonna have that stronger growth and service revenue.
So service either it will be about 17%.
Yeah, it's gonna probably be more.
Okay.
Oh when I was just wondering if you could just on the penetration rate cause you guys see can you maybe I'm past that in terms of you know.
What what is the penetration rate at the start of the the large cabin aircraft and and how does that <unk>.
Change is you'll get down into the small Jackson and what do you think the realistic targets are for for those different aircraft charges over time, and then Jessie to just one last one for you I I'm, the $30 million in strategic and operational spam this year.
You just clarify if we look at back pocket as a whole what was it in 22 and as we look at 24, what does it look like in 24, I know you talked about the G. G. G. P. B span for 24, but just the other elements as well, let's see if we could just get an apples to apples on that $30 million.
So I'll start with the segment and Jesse can mention the financial question.
About half the heavy jets.
The U S market have it's like an activity today about half the medium sized jets.
Down in the mid twenties on the light jets, and it's very small and the turboprops. So we see.
Frankly plenty of and grabbing all those get five segments. If you will.
And globally. This is.
Even more dramatic I think 95% roughly in the market.
Doesn't have connectivity today there are <unk>.
A couple of thousand heavy <unk> of which I don't know I hear 900, I think have.
Connectivity roughly the rest of the market frankly doesn't even have an IMC product that.
That that's available to them in terms of broadband IFC, so medium sized jets on down overseas.
Nothing in this space.
And territory.
Okay, and large dresser or it was in the U S.
Right right.
<unk> did you say the penetration rate for lunch.
Yeah, I did I said heavy Jess about 50%.
Okay, great. Thank you.
And then as far as the 30 million spending landed the for five G. We spent about 2 million and Opex. This year and GBP 4 million. So the five G is mentioned is going to increase it'll be 9 million and GBP is around 14 this year.
And then for next year, the GBP is gonna be the password to spend around 30 35 million.
To the to be the two each kind of aggregate at $50 million in total.
And then in terms of the offer other operational initiatives, it's probably gonna be somewhere in the range of $5 million to $10 million a shift.
Right. That's very helpful. Thanks for taking my questions.
Yeah. Thank you one moment please.
Our next question comes from the line of Louie Palmer and blame Blair. Your line is open Mr. <unk> on line is open.
[noise] Great can you hear me.
Jeff How're you doing.
Excellent and.
Jesse and we're all good morning, and barriers and Jessie I am sure.
Both of you will do great on the next phases of your respective careers.
Sounds like <unk>.
Start starting off global broadband is obviously critical for Douglas future Oh, what caused you to expedite your planned launch timing for the the G. B B service typically projects and the satellite industry are are delayed often by several.
Ears, but for T V B U S pushed it forwards.
So what's behind that.
Oh well.
We have a good partner use.
Really mature development processes of manufacturing processes, and I think we've been very organized as well and frankly oneweb is only pitched in and it's been a great working relationship.
So we started with a light 24 early 25 kind of target.
Do have some incentives built into our contracts to accelerate that and.
Excuses responded to that and come up with ways to to to to get the attendant sooner. So I will continue to work on other ways it might speed it up further.
Time is at the essence for us in this we really wanted to get to market as fast as possible.
Great and on on the financial side either.
Therefore, the the new C F O R. B O C F <unk> in terms of the.
The 2025 free cash flow target, what does that assume for <unk>.
<unk> Capex and interest expense.
In 2025, I think surprised by that point in time or Capex is going to be.
Sort of in that maintenance range that was around $20 million for maintenance Capex.
And that interest expense.
You know obviously it depends upon the foreign racing and what happens with regards to that but it should be.
Depending upon where we are with the interest expense somewhere in the range of.
38 $45 million in interest expense, depending upon what happened to the rates.
Probably 40 and 45 cents.
Awesome. Thanks, Thanks, Jessie thanks.
Every month.
[noise]. Thank you.
And there was a time for questions today I'd like to try to call back over to will Davis for any closing remarks.
Thank you Valerie and thank you everyone for joining recall this concludes our fourth quarter earnings conference call. Thanks, very much men disconnect.
Thank you ladies and gentlemen does that conclude today's conference. Thank you all participating you may now disconnect have a great day.
The conference will begin to T to raise and lower Johan <unk> you can dial 911.
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