Q1 2023 Gogo Inc. Earnings Call
Speaker 1: I.
Speaker 1: You.
Speaker 2: Good day and welcome to the first quarter 2023 GoGo Inc. earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation there will be a question and answer session. To ask a question during this session you will need to press star 11 on your telephone.
Speaker 2: You will then hear an automated message advising that your hand has been raised. To lower your hand, press star 11 again. Please be advised that today's conference is being recorded.
Speaker 2: It is now my pleasure to introduce Vice President of Investor Relations, Will Davis.
Speaker 3: Thank you, Andrew, and good morning, everyone. Welcome to GOGO's first quarter, 2023 Earnings Conference Call.
Speaker 3: Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward looking statements regarding future events and the future performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward looking statements on the conference call. Those risk factors are described in our earnings release file this morning in a more fully detailed under risk factors in our annual report on form 10K and 10Q.
Speaker 3: In other documents we have filed with the SEC. In addition, please note that the date of this conference call is May 3rd, 2023.
Speaker 3: Any forward-looking statements that we make today are some assumptions as of the state. We undertake no obligation to update these statements as a result of more information or future events. During the call we will present both GAB and non- GAAP financial measures.
Speaker 3: We've included a reconciliation and explanation of adjustments and other considerations of our non- GAAP measures to the most comparable GAAP measures in our first quarter earnings release. This calls being broadcast on the Internet, and available on the investor relations website at gogo, excuse me, at ir.gogoair.com.
Speaker 3: The earnings press release is also available on the website. After management comments will host a Q&A session with the financial community only.
Speaker 3: It is now my great pleasure to turn the call over to hopefully.
Speaker 4: Thanks, Will, and good morning everyone. Thanks for joining us today.
Speaker 4: I'll focus my remarks on three main areas. First...
Speaker 4: I'll provide a state of the business aviation industry as seen from Google.
Speaker 4: And third, I'll give an update on the key strategic initiatives we're working on to drive accelerated growth in 2024 and beyond. Jesse will then walk through our quarterly performance in 2023 outlook before we open up to call to your questions. Let me start with the state of the industry. The business aviation industry continues to serve demand at much higher levels than the pre-pandemic period. Driving excellent new installation numbers for Gogo, which we expect will translate into high margin current service revenue. The primary driver of Gogo's long-term value creation model.
Speaker 4: So dealers and OEMs are still navigating some supply chain in labor woes.
Speaker 4: The avionics industry is in the midst of returned to normal operations.
Speaker 4: and don't immediately need to backfill for those installs, which is why despite having our second best new install quarter ever, we do not have as much equipment revenue to show for those installs as we normally would. We've seen this movie before. After a very strong Q4 in 2020, we suffered a 30% decline in equipment revenue in Q1 2021. Only the finish 2021 with very strong equipment revenue growth for the year. We also saw this in 2019-20.
Speaker 4: Regardless, we're confident that our record 2022 statements will translate into strong activations in 2023. According to our dealers and OEMs,
Speaker 4: 75% of GoGao inventory in the channel now has either a named customer or an aircraft serial number associated with it.
Speaker 4: As for the rest of the inventory, we expect demand to take care of that. However, we're also launching some dealer incentives to help that process along, and we're working with some of our smaller dealers to shorten install times so that they can sell a go-go as a standalone outside of a large maintenance event.
Speaker 4: We've had some great success thus far in a Brock stand alone upgrade install times down to 5 to 7 dealers with 5 to 7 days with some dealers.
Speaker 4: and are on track to get advanced upgrades times down to three days on some models with another deal.
Speaker 4: In general, the larger dealers are extremely busy.
Speaker 4: The elevated flight activity that started with COVID is accelerating the pace at which planes need to get in for required inspections and maintenance events.
Speaker 4: Many charter and fractional fleets literally have planes parked on the tarmac grounded until they can get into the shop for maintenance.
Speaker 4: Meanwhile, dealers continue to suffer labor shortages and some parts shortages.
Speaker 4: For GoGo, this has translated into more opportunities for the Elliston Star equipped.
Speaker 4: But that's been tempered by dealers sometimes not having enough workers to install or equipment if the work is to work is to occur during a fixed maintenance window.
Speaker 4: Similar post-COVID return to normalcy trends temporarily impacted our AOL count in the first quarter.
Speaker 4: The first is the higher level of maintenance events. Most owners turn off their go-go service while they're in the shop or grounded on the tarmac waiting to get into the shop.
Speaker 4: The second is the increase in secondhand aircraft inventory. Though still well below the historical average of 5.6% of the U.S. fleet, there's been a big jump in used aircraft for sale this year, from around 2.5% to 3.6% of the fleet, which impacts our AOL because customers typically turn off their Wi-Fi when they park the aircraft for sale.
Speaker 4: However, those sales are also an opportunity as the new owners usually react to Vager service and often upgrade before the plane comes back into service.
Speaker 4: Taking a step back, GoGo's installed base is evidence of both our strong market position today as well as the immense opportunity we see ahead.
Speaker 4: Of the 15,000 business jets in the North America, in the North American market, almost 50% of them have a go-go IFC system installed today, of which almost half are installed with advance.
Speaker 4: Advances are perfect stepping stone for high-performance oriented customers with easy upgrade paths to either 5G or GBB, as they both utilize the same advanced infrastructure on the airplane, making it easier and cheaper to stay with GoGo and upgrade then to move those competitors products.
Speaker 4: For this reason, the continuing to expand advanced penetration is a cornerstone of our strategy. Meanwhile, based on our research, the rest of our customers, that's non-events, are generally satisfied with their current global classic product.
Speaker 4: Our loyal install base provides a solid financial foundation for our business for years to come. And the other 50% of the business jet segment and the highly unpenetrated 10,000 aircraft TurboProp market represent an opportunity for future growth. So let's move to our Q1 performance. The message is that despite some bumpiness as the industry returns to pre-COVID patterns, we had our second best new install quarter ever. And our best first quarter installs ever. We delivered first quarter revenue of 98.6 million.
Speaker 4: up 6% over prior year, driven by record service revenue, our primary value driver.
Speaker 4: The impacts on our equipment revenue were most significant in January and February , but in March shipments were back on track.
Speaker 4: April was much better than January and February but still a little off track.
Speaker 4: So we feel we're on the right trajectory, but still a wood to chop to get back on flame. Our operating metrics for the quarter were strong, but twice as many customers upgrading service is downgrading and continuing strong aircraft retention rates of greater than 90%.
Speaker 4: On the bottom line, Gogo delivered first quarter adjusted EBITDA of $39.7 million, down 7% year over year, reflecting softer equipment revenue as we just discussed, and increased spending on our strategic initiatives, which Jesse will discuss in a moment.
Speaker 4: up from 565 three years ago, and with currently committed purchases will grow to almost 800 in 2025. Our OEM relationships are very important to us, and advance is either standard and an option on all 29 models of aircraft currently in production.
Speaker 4: This is a huge advantage for us as we launch 5G and GBB. They are merely extensions of systems that are already certified and installable on all makes of aircraft.
Speaker 4: Now let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our three pronged strategy.
Speaker 4: First, we want to expand our service addressable market by broadening the advanced platform product offering and adding networks to meet the needs of each segment of the BA market globally.
Speaker 4: Second, we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide easy upgrade paths as new technologies emerge.
Speaker 4: And third, we'll offer the best product and the best service to each segment of the market at the lowest total cost of ownership.
Speaker 4: We're making great strides in our strategic initiatives to achieve those goals, including our 5G network, our GBB LEO offering, our FCC replacement program, and the numerous operating initiatives I discussed on the last call.
Speaker 4: We remain on budget and on track for a commercial launch in the fourth quarter of this year. Once live, our 5G network is expected to deliver speeds roughly 5 to 10 times faster than Gogo's current ATG networks, with peak speeds up to 25 to 30 times faster, enabling 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 satellite solutions. In the meantime, customers who want Gogo 5G service can install the advanced L5 system today with full 5G provisions.
Speaker 4: and operate on Gogo's 4G network until the 5G X3 box is available. Once the X3 is ready, it can be installed quickly and 5G service can begin immediately, saving downtime and expense.
Speaker 4: We're extremely pleased by the market's excitement for GOGO 5G, evidence by our pre-provisioning momentum.
Speaker 4: We delivered 52 pre-progission SIP sets to customers in Q1. We have 116 end customers that have signed up for pre-provisioning promotions and we have 98 dealer purchase orders in in-house. We also have order commitments from 4 OEMs in our discussion to several others.
Speaker 4: We have SDCs in process for 20 aircraft models representing roughly half of the business jets in North America. Now turning to our LEO-based global broadband initiative, which adds an electronically steerable antenna to the advanced platform and adds the one-web low Earth orbit satellite constellation to our network offerings.
Speaker 4: LEOs are particularly well suited to business aviation because their low altitude enables an equivalent link budget with less power than with geo satellites.
Speaker 4: thereby enabling a global coverage with smaller tendons that fit better on most business aviation air.
Speaker 4: Our goals for the Global Broadband offering are to first
Speaker 4: expand our total addressable market to include 14,000 business aircraft registered outside of North America.
Speaker 4: Most of which have no access to broadband connectivity today. Second, to add a satellite feature for the thousands of US super mid and heavy jets that fly global missions that have Google Advanced ATG installed for use over North America today. And third,
Speaker 4: drive enhanced stickiness in our core North American medium-sized and smaller aircraft segments by offering an easy path to add a LEO product if they desire more capacity.
Speaker 4: We expect GVB will enable streaming directly from your favorite video services, multiple simultaneous video conferencing sessions, VPN access, and all the other connectivity enabled solutions you use today.
Speaker 4: the same service levels you expect in your office or living room today.
Speaker 4: We continue to make great progress alongside our partners.
Speaker 4: OneWeb will supply the LEO network, completed launch of its 588 satellite global constellation in April , and is on track to have the network deployed and Arrow ready in 2024 as expected.
Speaker 4: We completed preliminary design review at February with Hughes, our partner on the antenna side.
Speaker 4: Our GVB product is received a very enthusiastic response from our OEMs, the other partners in fleet managers.
Speaker 4: And we hope to have some exciting news on that front in the not so distant future.
Speaker 4: Now let me talk about a couple of competitive advantages of GBV. First, a small form-factor antenna is designed to work on all size aircraft.
Speaker 4: while our only current LEO competitor is trying to deliver a very large intent that will work best in the already very competitive heavy jet segment of the market. Second, GoGo offers much better customer service in a very small but complex and service sensitive market.
Speaker 4: And third, Google will be the only inflight connectivity provider that can deliver a combination of Leo and leading ATG services.
Speaker 4: enabled by our unique advanced multi-barrer capability. Together, the combination of Gogo 5G and GBB will deliver a truly unparalleled experience for passengers using heavy data applications like Zoom or gaming, offering a unique performance advantage over competitors by virtue of our proprietary ATG spectrum and technology.
Speaker 4: Importantly, we're well positioned to leverage our existing international footprint to support GBB customers outside the US.
Speaker 4: The 20 plus dealers already in place and 900 narrow band customers in 90 countries today.
Speaker 4: Before turning it over to Jesse, I'd like to provide an update on our FCC Reinversive Program.
Speaker 4: Last summer, Gogo was awarded a $334 million grant under the Federal Communication Commission Secure and Trusted Communications Networks Program.
Speaker 4: It would reimburse the company for expenses associated with accelerating the removal of Chinese telecom technology from the 3g and 4g networks.
Because there were more qualified grants than originally planned, all grants were cut back to 39% of the original award, which in Gogo's case is $132 million.
Legislation with bipartisan support has just been introduced. It would fully fund the grants awarded by the FCC, and we are hopeful that that will be approved. Because the functionality of replacement ground-based equipment will be better than the equipment installed on our 3G and 4G networks today.
Gogo will get some significant benefits from this network refresh, including 40% improvement in connectivity performance for advanced L3 customers and almost doubling of the number of aircraft the network can simultaneously hint.
Jesse will provide some directional guidance on the expected financial impact of this program, which is not yet reflected in our guidance, in which we will address on our Q2 earnings score.
Jesse will also write more detail on our recent 100 million debt paydown in our Moody's upgrade. I will just state that we are committed to using our capital wisely.
while returning capital to shareholders remains a priority.
Given the current interest rate environment and that our interest rate hedge will come down by $125 million in July , we thought it was most prudent to reduce our leverage at the current time.
Overall, we're excited about the future and believe Go! Go! has the right strategy in place.
continue to capitalize on the significant opportunity in our market and deliver long-term value creation.
We're confident that our Fundamental Business Model provides a strong foundation to support the strategic and operational initiatives we have underway, and that our investment strategy continues to support our release of free cash flow in 2025 and beyond.
that our Fundamental Business Model provides a strong foundation to support the strategic and operational initiatives we have underway, and that our investment strategy continues to support a release of free cash flow in 2025 and beyond. And now I'll turn it to Jesse for the numbers.
Thanks, both, and good morning, everyone. Gogo continues to generate strong financial performance, even as we've undertaken significant strategic investments like Gogo 5G and our global broadband product, or GBB. This is a true testament to the strength of our underlying business model and financial position.
In my remarks today, I'll start by walking through Gova's first quarter financial performance in more detail. Then I'll provide an update on our balance sheet and capital allocation strategy, including the paydown of debt we executed today. And I'll finish up with some additional comments on our 2023 and long-term outlook. Total revenue of $98.6 million is $1.5 million. And I'll provide an update on our financial performance in more detail.
first quarter, representing 8% growth versus the prior year and 2% growth sequentially.
Advanced units online, food at 3,447 units, up 28% year-over-year, and now comprised 49% of our total fleet.
We expect our advanced aircraft online growth rate to accelerate in the coming months as dealers resolve staffing challenges that are contributing to slower installation rates and more of the equipment we shipped at the end of last year is brought online.
We continue to expect the primary service revenue growth driver to be from additional aircraft online as we execute in a global market that is only 22% penetrated with in-flight connectivity and we launch two new products, 5G and GBB. Total ATG R approved grew 2% year over year to...
and or are prudent opportunity over time. Moving to equipment, GoGo delivered $20.1 million in equipment revenue in the first quarter, a 9% decrease year-to-year, and 35% decrease sequentially from the seasonally high and record fourth quarter.
We shipped 223 advance units this quarter down 9% year-to-year and down 43% sequentially for electing standard seasonality for our business that was particularly pronounced due to record shipments in the second half of last year.
as well as the normalization towards pre-pandemic order dynamics that OECS had discussed. To remain confident that the strong, secular underlying drivers of IFC demand and our strong position in an underpender-traded BBA market will continue to propel our equipment sales in the future.
We ended the quarter with a strong backlog and about half of our expected 2023 equipment revenue budget already secured.
Overall, we're expecting our 2023 top-line performance to skew towards the second half of the year, with stronger activations and shipments in the third and fourth quarters.
Now turning to profitability, GoGo delivered strong service margins of 79% in the first quarter, consistent with the prior year period and slightly above our budget, driven by lower network costs.
We continue to expect long-term service margins in the 75 plus percent range and to be the primary lever for free cash flow generation and long-term value creation.
Equipment margins were 10% in the first quarter, 26 percentage points lower than the prior year period, and 22 percentage points lower sequentially.
The decrease in our equipment margin was primarily due to additional costs related to the FCC reimbursement program and increased production costs driven by our expected 5G launch in the fourth quarter.
As Oak described, we have determined to participate in the FDC Reimbursement Program. And by doing this, we incurred $1.3 million in inventory by Dochkov.
In addition, we incurred $1 million in cost this quarter, replacing a large number of EVDO aircards in advanced-equipped aircraft with dual-modem aircards. These FCC-related costs drove down equipment margins by 12 percentage points.
We expect equipment margins to go back to plan levels in the 25 to 30% range in the quarters ahead.
Now moving on to operating expenses. First quarter combined engineering design and development, sales and marketing in general, and administrative expenses increased 15% year-over-year to $29 million, and on a sequential basis operating expenses were flat. The year-over-year increase in sales and marketing increased 15% year-over-year to $29 million.
reflects development expenses for GBB as well as higher personnel costs. As we previously stated, we expect that 2023 and 2024 will continue to be investment years as we complete our 5G program and ramp up spending for GBB.
We continue to anticipate that these investments will support sustained strong top-line growth, and once completed, we'll be a key driver to significant free cash flow growth in 2025 and beyond.
In terms of Gogo 5G spending, we continue to stay on track and on budget for Gogo's 5G's commercial launch in the fourth quarter of 2023.
While our timeline has shifted, we have remained on track with the cost expectations we set back in 2019 that GoGo 5G in external development and deployment costs would be approximately $100 million.
In the first quarter are $2.6 million of 5G spending with comprised of $2.2 million in CapEx and $0.4 million in OPEC.
Now, on to our GBB initiative. In the first quarter, Gogo incurred $1.5 million in operating expenses related to GBB.
We continue to expect external development costs for GBB to be less than $50 million over three years with approximately $14 million in 2023 and the remaining spending to occur in 2024.
As we previously stated, we anticipate that approximately 95% of GBB external development costs will be in OPEX.
This spending profile is reflected in our 2023 adjusted EBITDA and pre-cash flow guidance.
Moving on to our bottom line, GOGO's first quarter adjusted EBITDA decreased 7% year over year to $39.7 million primarily due to lower equipment revenues and increased operating expenses, including GBB. GOGO delivered net income of $20.4 million in the first quarter.
down 8% year over year, translating to 16 cents in basic earnings per share and 15 cents in diluted earnings per share.
As a reminder, our financial statements reflect non-cash income tax expenses as we continue to generate positive tax income. Based on our substantial NOL position, we did not expect to pay meaningful cash taxes for this extended period, but we may pay a modest amount by the end of our planning for rights in.
We continue to expect additional reversals of portions of evaluation allowance against deferred tax assets within the 2023 fiscal year.
In the first quarter, we generated $20 million in free cash flow, up $11.2 million compared to Q1 2022 due to a decrease in networking capital from lower accounts receivable and lower 5G CapEx. Free cash flow was down $5 million sequentially.
primarily driven by employee bonus payments made in the first quarter. Now I'll turn to a discussion on our balance sheet. We ended the quarter with $712.3 million in outstanding principle on our term loan.
and $188 million in cash and short-term investments, with our $100 million revolver remaining undrawn. At the end of the quarter, Gogo had a net leverage of 3.1 times, in line with our target range of 2.5 to 3.5 times. As we announced on May 1st, Gogo made a strategic decision to pay down an aggregate principal amount of $100 million on our outstanding term loan debt facility. As mentioned on previous calls, while we have a hedge agreement in place, and before the pay down were more than 90% hedged, the first step down to $525 million will occur in July .
The pay down will materially reduce our interest expense, minimizing our exposure to the current volatile financial environments, and ultimately strengthen our financial and strategic flexibility.
As a result of the pay down, Google will reduce its term long be of standing principle to $612.3 million.
gross leverage at the end of Q1 with 4.2 times, and it will be reduced to 3.6 times after the P down.
On an analyzed basis, we expect to reduce cash interest by approximately $8.5 million based on current SOPRA rates. And in 2023, interest costs will be reduced by approximately $4.5 million based on the April forward SOPRA curve and $50 net of foregone interest income.
As a result of executing a more conservative financial policy with a lower leverage target and paid-owner debt, this week Moody's upgraded our credit rating to B1 with a stable outlook.
The pay down of our debt is in line with our balanced capital allocation strategy. As a reminder, our priorities are, first, to maintain adequate liquidity. Second, investing in strategic opportunities to drive competitive positioning and financial value, including 5G and GBB. Third, maintaining an appropriate level of leverage for the economic environment.
with a target net leverage ratio of 2.5 to 3.5 times. And finally, returning capital to shareholders as appropriate in the future.
Now I'll turn to our outlook. GOGO is reiterating our fiscal 2023 financial guidance and long-term targets.
We continue to target 2023 revenue in the range of $440 to $455 million.
While we've had a slower start to 2023, due to the dynamics of discussed earlier, we continue to believe 2023 will be a strong new year for aircraft online growth as the record units we shift in 2023 are activated, driving recurring high-margin service revenue and additional equipment sales follow, particularly in the second half of the year.
which reflects the shift of $6 million from 2022 to 2023 related to the chip delay, approximately $14 million of GBB development spend, and approximately $7 million in additional operational initiatives focused on penetrating the 78% of the global market.
business aviation in flight connectivity market that remains untapped and maintaining our long-term competitive
We expect 2023 free cash flow of $80 million to $90 million, which includes capital expenditures of approximately $30 million to $40 million, of which $20 million is tied to global 5G.
Even with our investments in exciting new products, we expect your year-to-year free cash-roll growth in 2023 of nearly 50% at the midpoint of the guidance.
Importantly, our 2020's regardless does not reflect the impact of GOAS participation in the FCC's secure and trusted communications networks and reimbursement program.
As previously mentioned, Google plans to proceed with the FCC program by submitting an initial reimbursement request before the July deadline.
Since the program is currently partially funded, we have some optionality in what we request reimbursement for that could impact where grant money received will be recorded between the income statement and balance sheet. We will be solidifying our plans over the next couple of months, but in the interim, I want to provide some directional contact on how the reimbursement program could impact our 2023 out. At a high level, we have to be free cash flow.
to see the in-person program.
in the second half of 2024.
We reiterate that we expect revenue growth at a compound annual growth rate of approximately 17 percent from 2022 through 2027, with global broadband materially contributing to revenue in 2025.
We also expect annual adjusted EBITDA margin to be in the mid 40% range by 2027, which includes continued investments in engineering design and development to fund innovation and market competitiveness in the out years. And finally, we continue to expect free cash flow of more than $200 million in 2025 and growing in 2026 and beyond.
We believe that our value proposition is underpinned by the strong growth in free cash flow as we complete our 5G and GBB investments and execute in an under-penetrated global market.
Gogo's 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 and invest in the strategic initiatives that will extend and enhance our long-term growth. Before we open the call up for questions.
I would like to thank the entire GoGo team for their continuous hard work and dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We are now ready to take our first question.
continuous hard work and dedication to our business and for providing unparalleled service to our customers. Operator, this concludes our prepared remarks. We are now ready to take our first question. Thank you.
Thanks. Good morning, everybody. Good morning, Rick. Good morning, everybody.
Hey, good morning. A couple questions if I could. First, Oak, you started with obviously the state of business. Mentioning 15,000 business jets out there. You guys have about 50% of that, 50% are advanced. Help people understand why do you think that market is so under-penetrated?
We talked a little bit about the technology changes and demographic shifts, but help people understand how you think that curve plays out of what drives people to say, yeah, I want in-flight connectivity on that pool of business jets. And then on the 10,000 turbo jets sticking with the US, what is it there? Does it require price? Is it antenna? What is it that gets turbo?
I don't know, roughly 10 years or so, I would say, isn't that bad when you think about it. You know, a lot of the jets are, frankly, older than, significantly older than the amount of time that this has been, our service has been line fit available at the OEMs. So all that has to come through the aftermarket.
And, you know, frankly, I think that service levels have to do with it. You know, I think that the incredible increase in the capacity we'll be delivering with 5G and GBB, etc., will be a real incentive for people to install service. Second, you know, you have to do it.
Generally, it's taken a long time to install. Our systems are faster to install than others, but still probably haven't been fast enough. So we've been really focused on reducing install times so that you don't have to wait for a big maintenance event. You might even just go in and do a standalone upgrade, or install rather.
I'd say in the lower end of the business jet market there's some price sensitivity, but that's where we've got L3 positioned and lower price plans that go with that. So I think that's why we've been pretty successful in driving penetration of the light jet market over the last couple years.
So it's a combination of all those things. It's generational. I mean a lot of business jets, you know, five, ten years ago, were old by people my age and many of those people didn't want to have connectivity on the jet or feel a need for it. That's really shifted as today. I think we did a poll of our of our user base.
Last year, you know, and 67% of them are now Gen X, Y, and Z, not baby boomers like myself. So I think those are all contributing factors. I think, you know, we've seen a real turn there and, you know, a much a real acceleration of the number of people, you know, installing. heart rate
That's that's that market in the turboprop market. I Think it's a couple things. I think price is definitely a factor in a lot of that market and again We've been trying to go down market You know we we've announced some deals with some of the turboprop Fractionals for instance we've got you know our serious deal, which is actually not a pure of a profit
a small jet, but sort of same market in some ways. But what we're seeing is, you know, more interest in, you know, from the turbo prop market, especially the charter part of that market, because people expect connectivity when they charter. So I think that that that is going to shift. And of course, with advance, we've been designing new form factors that are smaller and will fit in those more compact aircraft. So I think we have high hopes for that market. It's not going to be a high ARPU market, but it's a large market. So we make it up with quantity. And then overseas, the real issue is that most aircraft don't have an option today.
In the medium-sized jets on down, there's nothing overseas that they can really use. There's the EAN ATG network in Europe , but that's really not been sold to business aviation. I don't know all the reasons why they haven't done that, but they haven't.
So there's really not much of an option. And the good news about GBB is it's small form factor and competitive pricing will enable people to fit GBB on all those aircraft. So we think that's going to be a great opportunity for us.
Great, that's very helpful to help people can frame it. And I think Jesse mentioned that GBB could be material in 25. Is that kind of the hopes that GBB opens up and unlocks that 14,000 global opportunity that haven't had the...
availability before and that's why and what does material turn out to give us a hint of what immaterial might mean in 25. I am not in charge of the definition of material so I'll let Jesse deal with that but you know we're looking to emotionally launch the GBB.
So you can imagine install starting to hit now at the end of 24 and going into 25. So that's I think why we say material and we'll start getting service revenue really in 2025.
Yeah, yeah, okay, so it's still gonna be heavily weighted beyond the equipment side, but you'll start getting you know some service reviewed Last one for me of course you know I love service revenue guys rather than just total revenue against I do think the overall values Of the company's going to be more driven by service and the one-time equipment revenue, but the final one 100 million dollar debt pay down that sounds nice to get the debt reduced as the hedge kind of
that we would like to have on hand. As a reminder, we have the $100 million per ball available to us. So we always have that, but somewhere between 50 to 75 million, we'd like to be a little bit more conservative and making sure that we have that cash on hand, and especially if you noted.
with some inventory requirements that the CC initially until we get the reimbursements back from the government. So that could be a small lag in that initially. And with regards to the hedge paydown, we've got the 125 paydown that happens in July of this year.
And then the next pay down is in December of 2024. So it goes from 525 down to 350. And then it'll step down to 250. In terms of what's hedged, it'll step down to 250 December of 2025 and then December of 2026 down to 200.
Great, that helps a lot. All right, thanks everybody. Stay well. Thanks Rick. Thank you.
Our next question comes from the line of Phil Kusek with JP Morgan. Hi guys, thanks. You know, just a couple of follow-ups on Rick's questions. Maybe talk about the long poles to launch the GVB network. Any update on OneWeb's progress there? And what else has to happen for you to get that up and launched in 24? What are the big pieces?
And you talked about what the alternatives are today, but what are the alternatives that look like they're coming down the line? Who else is working on products for global private aircraft? Thanks.
Yeah, sure. So the long, there's two long poles. One is the OneWeb network. They've launched now all the satellites they need to complete their global network. They do have, I think, another two launches, but those are all spare satellites. So what they need to provide our service is actually in space.
They need to position those satellites now in their orbital planes and get them up and operational. I think that they will – and there's some software changes they make for ARO. So that will all get done I think by the middle of next year and I think that will be a slightly shorter pole than the other one, which is our building of our terminal.
our aircraft terminal, which we're doing with Hughes. That program is in great shape. I have to say, you know, working with Hughes is a real pleasure. Their operational maturity and program maturity is outstanding. And so we've been able to actually move that project in. It was going to be a early 25 delivery and now we're into the fourth quarter of 24.
Let's move to the left and I think we see frankly some opportunity perhaps to even move it in a little more. So that's going extremely well.
convention. So those are the those are really the two poles and I think both are in very good shape at the moment.
In terms of alternatives right now,
of alternatives right now, I think Starlink would be the main one.
They have a large antenna today, 39 inches long, 31 inches wide, which is
pretty much owned by some muscundity or another. They've been seemingly having difficulty getting STCs for that. And they're sort of making halting progress trying to get into the market. You know, personally, I think that...
We have great respect for Starlink and the people at SpaceX. They're literally a group of rocket scientists. We think that we'll be very competitive with them in our market.
with our combination of ATG and LEO, frankly, we think we're gonna have the best product on the market. When it comes to return link, we'll be much better than they are. And other factors I won't bore you with in terms of the geeky stuff, but we think we'll have a very competitive product. We'll have much better service.
in a market that is very complex and very service sensitive and very demanding of service. So that's good. And I think that on pricing, you know, we'll be very competitive. So you know, we think we can compete effectively with them. And then I guess the third point I make is, you know, coming into this market.
makes no sense for them. They're a great company. They do some things extremely well, obviously on the satellite side. But when it comes to markets, they generally do it two ways. One.
They have very standardized offering and going after very large markets.
like direct-to-home and it's you know relatively simple on the service side and you know the Musk marketing just aura you know is enough to sell that product and so that that works well for them and they do it at real scale and they get costs way way down but they you know they have to manufacture you know millions of
of terminals and the like to actually have the cost come down to where they need it. The other thing they do really well is really large customized programs like for the Department of Defense and the like. And their deals are worth billions and you know it's worth them committing huge teams of geniuses to build those programs and deliver them. But what doesn't really make sense is
getting into markets that are very small and require lots of customization and cost. And I'm not sure they're really good at that. You know, when it comes to the antenna, you know, they're trying to take a consumer grade antenna and beef it up for Aero.
You know, that doesn't really work in Arrow. Okay, it's got to be a ruggedized, Arrow standard manufactured piece of equipment, which is a lot different from what you can put on a home, right, is the same with routers, the same with every single component of what they have. So...
You know that level of customization For a very small number of units that doesn't make sense the level of service that you have to have for a very small number of units doesn't really make sense either. So I think
You know and if they come in and they dramatically cut pricing you know they're going to take us up three or four hundred million dollar service market today and make it 150 million dollars service revenue market that doesn't really make sense Because you know that's a rounding error in their numbers, so yeah That's our our take on on them, and then I think
You know, SATCOM Direct has a deal with OneWeb as well as we do. We don't see a lot of progress from them in that front. They seem to be pushing some of their other products more heavily, but I mean, I think we always have to take them seriously. They're a good competitor. So I think that's kind of the competitive landscape.
That's helpful. Thanks. Thank you. Our next question comes from the line of Landon Park with Morgan Stanley .
Great. Good morning, everyone. Thanks for taking the questions. I was wondering if we could.
I was wondering if we could start on the OEM side. I'm wondering if maybe you could comment on what kind of pay-grates you guys have been seeing out of that channel and maybe how that's trended over the last couple years and any early indications you've had from them regarding GBB.
Just, you know, what the outlook looks like there. And then separately, I was just wondering if you could talk about what the EBITDA cadence might look like through the year, given that, you know, the one Q level was already at sort of the high end of your guidance. It seemed to include some on-time expenses. So how should we think about the puts and takes through the rest of the year there?
Sure. I'll take the OEM part and leave Jesse with the hard numbers part on EBITDOT. Our take rates vary widely by OEM, I would say. We have very high take rates at the Textrons and OEMs and Embraers today. Less so at Gulfstream coming out of LineFit, for instance, but we often get put in...
the way to think about it, about 65% of OEM deliveries stay in the United States, something like that. And so we're kind of limited to that side of the opportunity, if you will. And, you know, we would be on almost all text drawn planes delivered to that market, a very high percentage of EMBER errors.
You know, and then less so, like I just said, on the Gulf Streams and Bombardiers and so.
and then less so, like I just said, on the Gulf Streams and Bombardiers and so.
However, we have very high penetration of the Bombardier Gulf Streams into Sows, but again, that generally comes in in the aftermarket. I would say our tank rates have been growing, which is good. And then I would say that on GBB, the
The receptivity is just outstanding. And I've never seen the OEMs as excited as I see them now about that.
In terms of the EBITDA for the rest of the year, so definitely the revenue is going to be higher on the second half of the year than the first half as we talked through. But we will have some increase in expenses. So in Q1, the GBB expenses is only one point.
million and 5G expenses is only 0.4. So both for 5G and GBB, those expenses are going to be picking up as well as the other operational initiative expenses. So that will have some impact on the EBITDA going forward while the revenue is growing. Understood. That's very helpful.
of what you guys can get off of that. And just maybe more broadly, are you seeing anything on the macro side? Have you picked up any customer sensitivity or anything along those lines?
We haven't shared the attachment rates at the OEMs. We can contemplate sharing those in the future. So I'm not going to give you exact numbers, but like I said, if you, first of all, write today, we are limited to those that are being delivered in the US. I'm going to give you a little wrinkle, which is sometimes those that are ordered overseas.
at Textron deliveries in the US, we're probably close to 90%.
something like that. If you look at the Gulf Stream, it's going to be at the other end. It's going to be 20%.
when you know it's sometimes in the aftermarket at least if it's a relatively new Gulfstream it's going to be at a Gulfstream aftermarket facility generally you know we don't look at that I would say as a line fit OEM install so we don't really count it that way.
So let us contemplate whether we'll share that in the future, but I think I've given you the color.
That's very helpful. Is there anything on the MACRA that you would know? When you say MACRA, you mean macroeconomy?
That's very helpful. And just anything on the macro that you would know? When you say macro, you mean macro economy? Yeah, the macro economy. That's people's feeling.
Well, you know, it's on people's minds. We did a little poll of our dealer advisory council and some road shows to visits dealers. And so, and all I would say, that's called that 12 to 15 dealers. And only one mentioned the economy being the issue. There are a lot of other things I've got mentioned that that.
you know might be might ultimately be economic, but we're more, you know, I would say micro in reality so You know, there's been no real impact in on on orders at OEMs, right? Well, I mean they continue to be strong and And from the dealer perspective, they're busier than they can really handle right now
uh, catching up on maintenance from COVID times. I mean, they're literally planes parked on Tom X.
that can't fly because they're no longer in compliance on their maintenance logs. And they're trying to get that work done so those planes can start flying again. So everybody's very, very busy. So I don't think the macroeconomy has really hurt the market.
Great, thanks so much for taking my questions. Thanks, Landon. Thank you. Our next question comes from the line of Lain Viteinza with TD Cowan.
Thanks guys for taking the question. Um, and maybe just to stay with the theme of the dealers and the shipments and activations and the turbulence there. I think. You know, the.
The concern is that it does raise the specter of perhaps the macro pressures are kind of bleeding into the business jet demand. But just to be clear, it sounds like really what happened is that the dealers requested a lot of shipments historically because the lead times had become concerning and now that's reversing. And it doesn't sound like the underlying kind of final demand.
has changed much. Is that fair? And I think you said if anything, it's stronger than pre-COVID and presumably it's also stronger than where it was before the supply chain sort of got challenging. Is that fair? Yeah, I think that's all fair. You know, we had a.
huge Q3 and Q4 shipments, record-breaking.
Some of that I think was driven by the still COVID ordering patterns. I think also our equipment prices go up every January first. So I think people were loading up ahead of time on equipment before the pricing increases kicked in. So, and I think that they bought an up inventory to last them well into this year.
you know, they don't need to backfill, you know, but they're taken off the shelf to install if they've got already got plenty of inventory on the shelf. So I think that's the real impact right now. The important thing to us is getting the gear on the plane and activate it and producing service rep because as Rick pointed out earlier, that's the real.
you know, golden egg here. So we're happy with that. And, you know, a little inside baseball, we had a really good activation quarter. It doesn't show so much in AOL because when people go into maintenance or they put the aircraft up for sale, you know, they often, almost always, suspend the service for, you know, a couple of months or however long it takes.
take long it takes to sell the jacks. So there's a little dampening there because those that was sale activities have picked up in the last year and and the maintenance activities are taking up. So that's all temporary, right? Most of those, the ones that go for sale almost all come back online often with an upgrade which we like and the ones that go into the shop they turn it back on as they come out of the shop. So and obviously they're grounded waiting to get the shop they're really not going to they're really going to turn it off. Yes, they don't.
However, if I do, because of my labor issues, I got to add two weeks to the two months and the customer won't accept that extension to the maintenance window. So those are the types of things that do dampen things a little bit. But like I said, it was our second best activation quarter ever and certainly our best first quarter activation.
Great. Thanks. Thanks. I appreciate it. Thank you. Our next question comes from the line of Louis de Palma with William Blair.
Hey, Louis. Oh, Jesse and Will, good morning. And Jesse, congrats on your first call as CFO . Thank you.
Oak, you provided several metrics for the 5G provisioning. What are the next steps?
technical milestones to look for with the 5D launch and is there risk that the launch could slip till early next year?
Well, we're on track right now in terms of getting the chip fabrication completed at Samsung and getting that chip.
to GTT Airspan and us on schedule. That looks to all be on schedule. We've done almost all the testing one needs to do on this system already, but we have not tested as anything that just relates to the 5D chip. So clearly though that testing has to take place, which will happen generally late second quarter, early third quarter. We'll be flying it in the third quarter.
You know, there's always the, you know, black swan, you know, possibility that something goes crazy at Samsung again or whatever, but with the amount of attention, Samsung, AirSpan, GCT, and we have all paid to this chip at this point, it would be shocking if there was a problem with it. So we're quite confident we'll be delivering in Q4.
small and mid-sized aircraft that only fly in the US. I know you were just talking about.
text-drawn aircraft, but do you think that those aircraft, those small and sized aircraft would be good candidates?
for the global broadband product, or do you think that for the small and mid-sized aircraft that only fly within the US that most likely they will stick with your...
ATG products as you know that appears to be you know fast enough for most of their needs as it relates to streaming or video gaming and phone calls and whatnot.
Yeah, that's 100% right, Louis. And I think also it'll be priced to appeal to that market. So, you know, I think that ATG, if the mission is generally US.
is a very good answer. And 5G is a very good answer. So that's where we're positioning that product. You know, the GVV product we're really positioning for is obviously the international planes that fly outside the US most of the time.
For heavy jets in the U.S. that fly outside the U.S. often enough to want to have a system that can handle that overseas. In that market today, we've already got, like in the heavy jet market, we're over 50% of U.S. heavies have our system, our ATG system on them today.
probably about half of the SuperMIDS have our system on them today. And a lot of those are advanced already. So for them to add a GBB, it's going to be a pretty heavy, pretty easy lift and it can replace their current geo-satellite products. Often they have us and the geo product. So a lot of that market looks at this and says, I'd really love to have one throat to strangle, one provider.
And you know, one price for the bundle package that I can, you know, pay one bill. And I think that the Leo will provide better service than Geo. So that market, that's the other market where GBB is really aimed. Great. And one last one for Jesse. Will there be a material step up and recurring? That day too. Right? Mm hmm. Okay. Okay. OK. Okay.
cost of service expenses with the launch of 5G this year and the global broadband networks next year? Will there be significantly higher backhaul costs and tower expenses and other data center software fees that we should be thinking about? I know Oak
Jesse, you've previously outlined expectations for significant margin expansion. I'm just wondering what types of additional costs we should be thinking about. So, 5G backhaul, it's in our guidance and it's in our long-term forecast that we've been providing. I'm just wondering what types of additional costs we should be thinking about.
So there will be some increase in the bioG backhaul. And as mentioned with GBB, you know, the, we're paying, you know, by the drink on that with one web. So that would be flowing through cost of service as well. But we still expect the margins to be in the 75 plus percent range in the long term. So that's included all in our plans.
Thanks, Jesse. Thanks, Oak and Well.
Thanks Louie. Thank you. Thank you. I would now like to turn the call back over to Vice President of Investor Relations, Will Davis, for any closing remarks. Thank you everyone for joining our first quarter earnings call. This now concludes our call and you may disconnect. Thank you.