Q3 2023 Gogo Inc Earnings Call
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Okay.
Good day and thanks for standing by welcome to the Q3 2022 Week Gogo, Inc. Earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Neil Davies VP of Investor Relations. Please go ahead.
Yeah.
Thank you Bella and good morning, everyone.
Welcome to Gogo <unk> third quarter 2023 earnings conference call.
Joining me today to talk about our results.
Hopefully thorn, chairman and CEO and.
Jesse Betjeman executive Vice President and CFO.
Before we get started I would like to take this opportunity to remind you that during the course of this call. We may make forward looking statements regarding future events and the future performance of the company.
We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward looking statements on the conference call.
Those risk factors are described in our earnings release filed this morning and are more fully detailed under our risk factors in our annual report on 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 November seven 2023.
Any forward looking statements that we make today are based on assumptions as of this date.
We undertake no obligation to update these statements as a result of more information or future events.
We've included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures.
To the most comparable GAAP measures in our third quarter earnings release. This call is being broadcast on the Internet and available on the Investor Relations website at IR Dot Gogo are dot com.
The earnings press release is also available on the website after management comments, we'll host a Q&A session with the financial community only.
It is now my great pleasure to turn the call over to our place.
Thanks, Bill and welcome to our Q3 2023 earnings call.
Goggle achieved solid bottom line results in the third quarter, despite aviation industry headwinds and a slowing of orders as customers await the launch of <unk> in Galileo both of which will reaccelerate our growth starting in the second half of 2024.
On the positive side several of the headwinds I discussed last quarter like suspensions and the Activations, which are mostly temporary in nature have started to normalize and in fact, we achieved the highest third quarter ever for new Activations.
On the flip side supply chain issues and labor shortages continue to impact our OEM and aftermarket partners delaying new aircraft deliveries and extending maintenance maintenance cycles, which in turn have reduced equipment revenue and slowed the growth of service revenue for Gogo.
Despite that we have maintained our profitability levels, partly due to a shift of <unk> investment dollars to 2024, and partly due to strong cost management.
As a result, we're lowering our revenue guidance for 2023 that raising guidance for adjusted EBITDA and free cash flow to the high end of our prior ranges.
Their changing guidance is very disappointing.
Near term headwinds do not change our view that Gogo is poised for explosive growth in 2025 and beyond and we're not changing our long term targets.
First we serve a highly underpenetrated market is 78% of the world's business aircraft flying without a broadband solution today.
Second we see unprecedented demand with a surge of travelers choosing to fly private aviation post COVID-19 and those travelers demanding connectivity.
Third we have an attractive business model based on recurring service revenue that drive strong cash flow.
Fourth we're incorporating new technologies into our platform to deliver order of magnitude improvements in service to dramatically increase our Tam by having products that meet the needs of every segment of the global market.
And.
To enhance our competitive position.
And finally, we have a strong balance sheet that enables us to make the investments necessary to deliver those new technologies.
The price for reaching that explosive growth and driving substantial returns for shareholders is a heavy investment cycle. We're now in.
This morning Im going to.
To start by highlighting the demand we see in the VA market. I'll then go through the data from the quarter and I'll close by touching on Douglas progress against our key strategic initiatives Jesse.
Jesse will then walk through the numbers and the rationale behind our guidance update.
So let me start with industry demand.
Industry observers typically use flight count as a proxy for private aviation private aviation demand and.
And in Q3, Gogo flight counts were down only 2% from the very high counts in 2022.
Which is an improvement from the 5% decline we experienced in Q2.
More importantly flight counts remains significantly elevated from pre Covid 2019 at plus 28% signaling.
Signaling to many in the industry that stronger demand is here to stay.
Those numbers are supported by the surge in OEM order books and on the sale of fractional ownership that we have seen over the past few years.
Meanwhile, data usage per flight hour for Q3 increased 15% over Q3, 2022 and increased 77% from Q3 2019.
In global market research conducted by Gogo when offered all current and currently announced IFC offerings.
<unk> and its competitors, 74% of all business aviation industry participants, but opt to add connectivity to those aircrafts today.
That stands in Stark contrast to broadband connectivity in the global fleet, which stands at only 23%.
Some of this demand is driven by a generational shift in who was flat.
Among the silent generation of older fires only 65% without for connectivity.
Among baby boomers that goes up to 78%.
And Jay and Gen X and Y that goes up to 87%.
And for Gen Z that jumped to 98%.
We believe those demographic trends bode very well for broadband connectivity penetration in business aircraft over the next 10 years.
Now, let me turn to Q3 results.
Overall revenue was down 7% from prior year with equipment revenue down, 24%, but our high margin recurring service revenue up 6%.
The biggest drivers of this performance were part shortages labor shortages and frantically busy maintenance schedules at the Oems and dealers.
Okay.
Part shortages have caused Oems to push out deliveries, which combined with a fair amount of gogo inventory in that channel has caused them to push out equipment orders from us, which is heard equipment sales and by extension dampened the aircraft online and slow growth in service revenue.
Part shortages of also force dealers to hold aircraft for extended maintenance times as they wait for critical parts.
As delayed reactivation timeshare Gogo, which in turn has dampened your aircraft online and slowed service revenue growth.
And finally labor shortages combined with heavy demand for critical maintenance as forced dealers to prioritize needed to fly maintenance of our discretionary spending like IFC.
Which has dampened equipment revenue and by extension you guessed it growth in aircraft online and service revenue.
On that last point.
As <unk> technology, and Leo satellite technology are poised to dramatically improve our product performance and potential new offerings from others gas customers have extra impetus to wait and see what gets delivered and avoid discretionary spending and ISC in the short run.
We saw the same phenomenon in Q1 2015 to Q1 'twenty to Q1 2015 to Q1 2017 timeframe when aftermarket quarterly shipments fell 28% in the two years before we launched events and Sox Guy who was making their first big marketing splash.
Despite those headwinds.
<unk> grew 86 units in Q3.
Down from 123 last year, but up substantially from the 18, we grew Q2 this year.
This stronger outperformance was driven by continuing strong new activations and a normalization of our suspension right.
All of which was partially offset by continuing weaker reactivation rates due to the elongated maintenance events I mentioned a moment ago.
New Activations and upgrades from classic to advance were particularly encouraging though short of expectations, we had our highest third quarter ever for new Activations at 214 up 11% from prior year, and our highest quarter ever for upgrades at 60 up 28% from prior year.
Strategically because advance allows customers to upgrade with gogo to new technologies like <unk> and lower orbit satellites much more quickly and economically then moving to a competitor. We believe that this continued migration to advance is very important.
In total events now accounts for 53% of our fleet up from 45% at the end of Q3 last year and that percentage will grow as our FCC Rep and replacement program rolls out.
What is important to note is it based on extensive interviews with customers. We are not losing clients to competitors, we're just losing time to parts and labor shortage.
Now, let me turn to shipments and field inventory.
Inventory in the field decreased by about 47 units in the quarter to roughly 857 <unk>.
Which on the 140 are not committed to a particular aircraft and of those 140, only 32 units at our dealers that did not install a high volume of Gogo systems.
For the reasons I discussed a moment ago, we had a significant decrease in advanced shipments this quarter to 192 versus 388 in Q3 last year, when we had a blockbuster quarter.
To put the quarter in a little more perspective, however, we still expect to have the second highest advanced shipment year ever in 2023, and we are seeing encouraging signs as new orders are much stronger than October than earlier in the year.
Now, let me turn to an update on our strategic initiatives and how we intend to accelerate growth with our three pronged strategy.
First we want to expand our addressable market by broadening the advanced platform hardware and network offerings.
The needs of each segment of the global market.
Second we want to drive customer loyalty by continually improving our networks and leveraging the advanced platform to provide easy upgrade path to new technologies as new technologies emerge.
Third we're focused on offering the best product and customer support each segment of the market at the lowest total cost of ownership.
We're making great strides in our strategic initiatives to achieve those goals, including our SEC secured networks program, our <unk> network.
And our global broadband Leo offerings, Galileo HTS and MTX.
I'll start with the FCC secured networks program and an encouraging an announcement from the Biogen administration.
You'll recall that last year Gogo was awarded a $334 million grant under the FCC's secure and trusted communication networks program to reimburse it for expenses associated with accelerating the removal of Chinese telecom technology from our <unk> network.
Because there are more qualified grants than originally planned.
Funding for all grants for cut back to 39% of the original award, which in <unk> case was cut back to $132 million.
The good news last week was at the White House included full funding for the program and its supplemental funding request to Congress.
Given that full funding has broad bipartisan support in Congress, we feel that it has a good chance of passage this year.
Full funding will help gogo defray the cost of replacing ours, ETE ground equipment, and moving Gogo classic customers to airborne equipment that are compatible with the replacement ground equipment.
Because the functionality of replacement ground based equipment will be better than the equipment installed in our <unk> network today.
<unk> will get some significant benefits from this network refresh, including a 40% improvement in connectivity performance for events L. Three customers.
And almost doubling of the number of aircraft with Atg <unk> network can simultaneously manage.
And a significant acceleration of Gogo classic customers upgrading to advance, which as I described earlier is the strategic benefit extending gogo customer lifetimes and the lifetime of our very profitable Atg networks.
We've already started work on the networks out of this project and expect to go live in early 2026.
On the customer side of this transition our goal is to convert all of the 3300 tails flying with our classic product today to new LR Hughes with LTE, our aircard over the next two years.
We've been in touch with all of those customers and I've actually spoken to more than 90% of them.
And of those that already have a preference the overwhelming majority are leaning towards an advance upgrade but the majority of those selecting the outsize.
Jesse will provide more details on the SEC program in a few minutes and how the costs and reimbursements, which are coming in quicker than expected fit into our guidance.
Now, let me turn to our Gogo <unk> Air to ground network program.
As a reminder, this product will have coverage limited to North America.
Deliver mean performance around 25 Megabits per second five to 10 times that mean speeds at Gogo as current offerings with peaks of up to 75 to 80 Megabits per second.
All at a more affordable price and competitive satellite products.
And global market surveys of business aviation professionals.
<unk> packages the number one pick.
Ahead of all current and currently announced competitive atg, and Geo or Leo satellite offerings, which bodes well for the durability of Gogo as high margin Atg revenue stream.
This is partly driven by the fact that the north American medium and lighter aircraft market segments are by far the largest in the world with more than 80% of all global flights, beginning and ending in North America, and though they want quality connectivity many operators those segments want it at an affordable price.
Last year Gogo completed build out of its 150 tower <unk> network with a Cisco core that provides nationwide coverage.
Next year, we'll complete our Canadian network.
We've also completed every aspect of the airborne equipment, except one our <unk> chip.
As Im sure Youre aware, we have had two significant delays to this program because of issues and bringing the <unk> chip up after completing fabrication of the chip foundry.
And to note that the issue of the chip was not in the <unk> block, but it was in the peripheral sub block.
Since July we have been working with our <unk> network and chipset suppliers on a remedy to break to the bring up problem.
Sadly that remedy involves a full re spin which establishes our ship date in the third quarter at the outside parameter of our earlier guidance.
That said, we're confident we will hit that timeframe because first.
Our our team feels that our chipset supplier has conducted a much more thorough analysis and is fully identified the root cause of this issue and is currently implementing a complete remedy.
Second our chipset supplier has brought a new design house into the project. It has superior simulation and modeling capabilities to the old design House.
Third the design House has a very solid record of getting it right. The first time.
And fourth.
We'll be utilizing new higher speed 50, megahertz field programmable gate array technology better known as <unk>.
Gogo expects to have the FPGA technology in place from our vendors in late Q1.
And to begin flight testing with it in Q2.
It will enable us to burn down all software testing risk.
Our <unk> design testing risk and our system integration risk.
And it will allow us to fine tune our network before ever receiving the actual <unk> chip.
Other milestones that Gogo will share as they occur next year include the startup and end of chip fabrication.
Gogo receipt of the chip after bring up and Gogo flight test of the chip.
Finally, we're having considerable commercial success with the product already.
Not only have we had no cancellations due to the delay.
We have orders from five Oems and have built an $8 $5 million backlog for ship sets.
We're also having success with <unk> pre provision kits, which allow customers to install the advance all five with full <unk> provisions and operate on Douglas <unk> network, while waiting for the <unk> slide five G box.
Once the allied side is ready it can be installed quickly and <unk> service can begin immediately saving downtime and expense.
We shipped 133 of those kits, including 67% in Q3, and what's really cool is it more than 30 of those ships that have already been installed in the aftermarket alone.
What's even cooler is it two Oems are already installing the <unk> antennas on every plane in which they install and events outside so that those planes will be ready to move to <unk> on the <unk> chip is ready.
Now I'll turn to our Leo based.
Global broadband initiatives Galileo.
Which adds a flat panel fuselage mounted electronically <unk> antenna to the advanced platform and as the Euro sat one web low Earth orbit satellite constellation to our network offerings.
Galileo comes in two flavors are smaller HD X terminal and a larger ft X terminal.
The Galileo HTS terminal is a small antenna that fits on almost all business aircraft and targets midsize and smaller jets. It a domicile outside North America and have no broadband solution today and be domicile inside North America, and often fly international missions.
The Galileo Mdx terminals are larger antenna that deliver significantly higher bandwidth and targets global Super mid size and larger heavy jets that slide transcontinental emissions.
The market survey as I mentioned, a moment ago also tested Gogo HTS MTX bundles against our current and currently announced competitive atg and Leo Geo offerings.
And they show those bundles outperforming all competitive satellite offerings by a considerable margin.
We've demonstrated our galata our technology this year at both the Geneva in Las Vegas, <unk> based conferences using the Eutelsat, one web network and Hughes antennas and have achieved mean speeds consistently approaching 200 megabits per second.
Worth, noting that these speeds will increase dramatically when you dose at one way it launches its gen. Two satellite constellation in just a few years.
Huge advantage for Gogo in these markets.
Galileo is a simple upgrades from any advance installed aircraft when only needs to add either our HTS or mdx antenna on the fuselage and then around data and power cabling and of the aircraft.
Given that advances already a line fit option that every OEM and has STC is on every currently flying model of aircraft in the aftermarket this will make it easier from the engineering certification perspective for Oems and dealers to offer Galileo has an option to their customers.
We've already signed alliance agreement with one OEM and have discussions underway with several others. We plan to start shipping HD X terminals in the second half of 2024 and Mdx terminals in the first half of 2025, and our satellite partner Udall set one web and our intent to partner Hughes continued to make great progress driving towards those days.
<unk>.
Eurostat, one web has completed launch of its 648 satellite Gen. One constellation and should complete its ground network can be ready for Aero use in Q2 2024 before our launch in the second half of the year.
We expect to receive pre production test units of the HTS antenna from Hughes in the first quarter and production equivalent units for flight testing early Q3 and are targeting first shipments a few months after.
With the addition of Galileo Gogo will have the most complete product portfolio and the business aviation ISC industry with products that offer the right performance the right coverage at the right total cost of ownership with great customer sort support for every segment of the highly Underpenetrated 38000 aircraft.
<unk> global business aviation market.
Overall, we're excited for the future and believe Gogo has the right strategy in place to continue to capitalize on the significant opportunity in our market and deliver long term value creation.
I want to end by thanking the Gogo team on both the frontline and those that support the frontline.
Because of you that were in this position.
With that I will turn it over to Jesse to do the numbers.
Thanks, Luke and good morning, everyone.
Brazil delivered solid bottom line financial performance as we continued to invest in our strategic and operational initiatives, including <unk> and Google Galileo to enhance our competitive position for the future.
In my remarks today I'll start by walking through the third quarter financial performance, then I will turn to our balance sheet and capital allocation priority.
Next I will provide an overview of the financial impact of the FCC program and finally I'll provide additional context around our revised 2023 outlook and wrap up by reiterating our long term targets.
Total revenues for the third quarter with $97 9 million down 7% from the prior year and down 5% sequentially.
We delivered record service revenue of $79 $5 million in the third quarter, a 6% increase year over year, and a 1% increase sequentially. Our atg aircraft online. The 7150 units as of the end of the third quarter, representing 6% growth versus the prior year and.
1% growth sequentially.
Those are showing improvement and incremental atg aircraft online receipt from <unk> 18 in the second quarter to 86 in the third quarter. These remained muted due to temporary suspension driven by elongated maintenance cycles, which took aircraft offline in.
In addition, we had record upgrades in the third quarter and while strategically important. It also contributed to the muted aircraft online growth as it replaces existing aircraft online.
Advanced aircraft online grew to 3784 and now comprise 53% of our total fleet up from 45% last year.
Increasing aircraft online with the penetration of our advanced products remains critical to the strategy both in the North American market and globally as we prepare for Gogo <unk> and Galileo.
As you mentioned last quarter, we continue to expect the advanced aircraft online growth rate to accelerate over the next several quarters as maintenance events start to return to normal levels, reducing suspension time and dealers work on addressing supply chain issues that are contributing to slower installation rates.
Total atg ARPA at $3373 slightly increased sequentially and slightly decreased versus the prior year driven by a shift in product mix.
The anticipated launch of <unk> in Galileo next year will further expand our ARPA growth opportunity over time, partially offset by continued L. III sales into smaller aircraft and lower priced data plans to drive incremental revenue growth down market.
Now turning to equipment revenue.
<unk> generated $18 $4 million in equipment revenue in the third quarter at 39% decrease year over year, and 24% decrease sequentially as advanced equipment units shipped decreased to 192 in the third quarter.
As Eric noted the decrease in advanced equipment units shipped largely reflects the impact of lingering inventory in the channel shifts in OEM orders to 2024 as well as delays in customer purchases as they wait for the expected launch of <unk> in Galileo and 2024.
Solar remains confident that our strong position in a global market that is only 22% penetrated with in flight connectivity coupled with the expected launch of <unk> in Q3 2024 <unk> in the second half of next year, we will continue to propel our equipment sales in the future.
Turning to profitability Gogo delivered service margins of 77% in the third quarter, which remains flat compared to the prior year quarter.
We continue to expect long term service margins in the 75 plus percent range positioning service as the primary lever for free cash flow generation and long term value creation.
Equipment margins were 33% in the third quarter, three percentage points lower than prior year period, and six percentage points higher sequentially.
Increase in our equipment margin compared to last quarter was primarily due to an accrual of $2 8 million for the expected FCC reimbursement of costs incurred to replace a large number of EDI aircard and advance equipped aircraft with dual modem aircard.
Out of the $2 $8 million of accruals.
$8 million related to Q3 shipments about $2 million was related to prior quarters activity back to 2022.
The positive impact of the accrual for expected FCC reimbursements was partially offset by an increase in production costs as a percentage of revenue due to lower equipment revenue in the quarter.
We expect Q4 equipment margin to decline as there is no catch up accrual for the SEC reimbursement.
Moving on to operating expenses.
Third quarter, combined engineering design, and development sales and marketing and general and administrative expenses of $25 5 million declined slightly year over year and decreased 3% on a sequential basis.
Our operating expenses decreased sequentially, primarily due to lower marketing related costs.
Google continues to expect 2024, it will be a significant investment year as we complete our Gogo <unk> program and ramp spending for Google Galileo.
We expect to see the benefit of these investments to sustained strong top line growth and an inflection point in free cash flow growth in 2025, and beyond and our core operating business.
In terms of <unk> in the third quarter, our $1 8 million or <unk> spending was comprised of $5 million in opex and one $3 million in capex.
As Eric mentioned Gogo is working with our <unk> network and chipset suppliers to resolve the <unk> chip issue and we now expect the commercial launch of <unk> to take place in Q3 2024.
We maintain our estimate of $100 million in total cost for our <unk> program, but the delay will cause approximately $10 million of Capex and $7 million of Opex from our original plans in 2023 into 2024.
Doug I expect this delay to dampen revenue EBITDA and free cash flow in 2024.
Now onto our Gogo Galileo initiative in the third quarter <unk> recorded $2 6 million in operating expenses related to Google Galileo and $6 $6 million year to date.
We continue to expect external development cost for Golar Galileo to be less than $50 million in total of which.
$10 million will be incurred in 2023, and approximately $30 million in 2024.
We anticipate approximately 90% of Google Galileo's external development cost will be in Opex.
Moving onto our Bottomline Douglas third quarter, adjusted EBITDA of $43 $2 million stayed relatively flat year over year.
EBITDA margin expanded to 44, 1% up 140 basis points from last quarter and up approximately 300 basis points year over year as we had growth in high margin service revenue, while maintaining strong cost control.
Gogo delivered net income of $20 $9 million in the third quarter up 4% year over year translating to 16 and basic and diluted earnings per share.
As a reminder, last quarter, we reported net income that included an income tax benefit of $63 8 million due.
Due to the partial release of the valuation allowance on our deferred tax assets related to the section 163, J interest limitation carry forward.
As of December 31, 2020 to Gogo had $562 million in federal net operating losses for $148 million and state net operating losses and $292 million in section 163, J interest limitation carry forwards.
As a reminder, our financial statements reflect noncash income tax expense as we continued to generate positive pretax income.
Just on our substantial NOL position, we did not expect to pay meaningful cash taxes for an extended period, but we may pay a modest amount by the end of our five year planning horizon.
In addition, our shareholder rights plan that is designed to preserve Nols expired in September the.
The shareholder rights plan was not renewed as changes in the shareholder base over a three year period have left.
Thus, we still have access to our large NOL position, but new shareholders are no longer restricted from purchasing over 5% of the outstanding shares of common equity.
In the third quarter, we generated $21 million in free cash flow up $12 $5 million versus prior year, primarily due to lower <unk> capex.
Free cash flow is also up $7 $7 million sequentially largely due to lower interest paid this quarter as we switched to a monthly cadence of interest payments on our term loan resulting in five months of interest paid in the second quarter.
Now I will turn to a discussion of our balance sheet.
We ended the quarter with $110 $8 million in cash and short term investments and $608 $7 million and outstanding principal on our term loan with a $100 million revolver remaining undrawn.
Net leverage was slightly lower to two nine times in line with our target range of two five to three five times.
As we previously mentioned we have a hedge agreement in place and we currently have 86% of our alone hedged. The next step down in the hedge to $350 million occurred in July 2024, with an increase in strikingly from 75% to one 5%.
As a reminder, Douglas capital allocation priorities remain unchanged and are aligned with our strategic goals and include first maintaining adequate liquidity.
Second investing in strategic opportunities to drive competitive positioning and financial value, including Google <unk> and Galileo.
Third maintaining an appropriate level of leverage for the economic environment with a target net leverage ratio of two five to three five times and finally, returning capital to shareholders as appropriate in the future.
With a strong cash balance our gogo <unk>, Galileo and other strategic projects well funded and our net leverage ratio at two nine times, including the $100 million of debt Paydown earlier this year.
And our strong confidence in the business, we were comfortable moving to priority for and returning capital to shareholders.
Our board of directors approved a share repurchase program in September with no set exploration date that grants authority to repurchase up to $50 million of shares of common stock.
This gives us the ability to opportunistically repurchase shares when we find that doing so offers an attractive value proposition.
However, we need to continue to balance the use of cash over the next year across our capital allocation priorities and especially in allocating funds between further pay down our debt considering high interest rates and a step down in our hedge and future share repurchases.
I would now like to provide an update on the expected financial impact of the FCC secure and trusted communication networks reimbursement program.
As Luke mentioned, we are encouraged that the white House recently issued a supplemental funding request that includes a call to Congress to fully fund the FCC program, which would significantly increase our total reimbursement value as we granted as we were granted a tier $334 million.
As mentioned in previous quarters, we currently expect to receive partial funding of $132 million.
As a reminder, we submitted our first claim in July which triggered the start of the one year clock to complete the program by July 21 2024.
In our application we stated that we will need to have multiple extensions to complete the program and are waiting to see if the FCC will grant a blanket extension are we will request an extension in the coming months on our own.
Gogo has incurred and will continue to incur costs for this program in three areas.
First network equipment for cell sites and data centers.
Airborne equipment for the swaps of LTE aircard to replace <unk> <unk> Air cards.
And partial rebates for customers installation cost to enable existing customer aircrafts to communicate to the new network and third operating expenses, primarily for flight testing network design and professional services.
We expect to spend will be partially offset by the FCC reimbursements.
As of September 30, we recorded a $16 2 million receivable from the FCC, which is included in prepaid expenses and other current assets in our balance sheet for the reimbursement of the costs I previously mentioned with.
With corresponding reductions to property and equipment inventory and contract assets and with the pickup in the income statement.
Going forward since the program is currently partially funded we have some optionality in what we request reimbursement for which could impact of our grant money received would be recorded between the income statement and balance sheets.
Previously Gogo expected 2023, and 2020 for free cash flow to be negatively impacted by the FCC programs.
And the benefit in 2025 due to the timing of reimbursement proceeds.
However, we are currently seeing reimbursements coming in quicker than expected potentially changing the swing effect on free cash flow over the years.
For example in 2023, we expect to spend approximately $20 million for the FCC program and recoup approximately $2 million in cash reimbursements, but with the reduced lag in the reimbursement process, we could receive more this year.
Nonetheless, with partial funding reimbursements are expected to be short of the total expected cost of the program through 2026.
Turning to our financial outlook Gogo.
Google updated its fiscal 2023 financial guidance to reflect current market dynamics.
Gogo now expects 2023 total revenue to be in the range of 390 million to $400 million.
The decrease is driven by a reduction in our equipment revenue, which was largely affected by shifts in OEM orders to 2024, and a delay in customer orders as they wait for the expected launch of <unk> in Galileo as I noted earlier.
We now expect 2023 adjusted EBITDA to be in the high end of our previously guided $150 million to $160 million range.
We were able to increase adjusted EBITDA guidance, despite lower revenue as we continue to prudently manage costs down as well as push out additional <unk> spend due to the delay.
This guidance includes spending on operating expenses of approximately $15 million compared to $20 million previously with strategic and operational initiatives, which include approximately $3 million in expected global <unk> spending.
Approximately $10 million of good legal land development spend and approximately $2 million in additional operational initiatives.
Our adjusted EBITDA guidance also includes approximately $7 million of costs related to the FCC program offset by $6 million of accruals for the expected FCC reimbursements.
We now expect our 2023 capex to be in the range of $25 million to $30 million, including $12 million for the Gogo <unk> programs and approximately $2 million related to the FCC program we.
We also now expect our 2023 free cash flow guidance to be in the high end of the previously guided range of $60 million to $70 million, including SEC related spend and the expected lag of FCC reimbursements.
Even with our investments in strategic initiatives and the FCC program, we expect nearly 20% year over year free cash flow growth in 2023, and excluding the FCC impact it would be nearly 50%.
As we previously stated 2024, we will continue to be an investment year with an increase in gorilla Galileo expenses anticipated, but further burdened due to the push out of <unk> spend.
These investments coupled with the lower shipments and lower aircraft online this year versus our original expectations and delay in <unk> launch are expected to negatively impact our financials concentration 24 to be a trough free cash flow year.
However go those long term targets remain unchanged they reflect our expectations for the launch of <unk> in Q3, 2024, and the launch of Google Galileo and the second half of 2024.
Reiterate revenue growth at a compound annual growth rate of approximately 15% to 17% from 2022 through 2027.
We continue to expect annual adjusted EBITDA margin in the mid 40% range by 2027 and free cash flow in the range of $150 million to $200 million in 2025 without the effect of the FCC program and growing thereafter.
We plan to provide 2024 guidance metrics and update our long term targets as appropriate on our fourth quarter earnings call as we typically do.
In conclusion, we will continue to deliver solid bottom line financial performance and we are committed to creating long term value for our shareholders and customers.
Before we open the call up to questions I would like to join Oak in thanking our entire team for their continued commitment to gogo and providing unparalleled service to our customers.
Operator. This concludes our prepared remarks, we are now ready for your first question.
Okay.
And I'll just ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Okay.
And our first question comes from the line of Ric Prentiss with Raymond James Your line is now open.
Thanks, Good morning, everybody.
Good morning, Rick and Rick.
Okay.
And your offers versus others.
On the <unk>.
Side, but interesting with Hughes announced the Delta regional jet.
Contract.
Wondering if you're thinking of.
Others start coming into the space as well.
And then maybe an update on the smart sky lawsuit, if theres been any changes.
Yes, so I mean.
The Delta Hughes deal is a large antenna geo product.
Product at this point so they are using this income $17 17 in Tennessee, which is about five feet long.
Not a VA aircraft type of antenna and it's not.
<unk>.
It does not use.
Leo satellites.
I think it's K, a which is important it's really meant to be a way for hughes to sell Jupiter capacity. So.
Yes.
They're our partner this is consistent with our agreements.
We have no issue with it at all.
Second I think you were asking about potential entrants.
Yes.
Yes, I think our confidence against potential entrance is really ground. We spent a lot of time over the summer.
Doing a lot of detailed market research and surveys around the world.
We did that was on a branded and unbranded basis.
A really cheap L three products.
The <unk> product for North American fliers generally medium sized jets on down that higher capacity and then the <unk> HD X.
For planes flying outside the U S. Our.
Medium sized jets in the U S.
Higher capacity and MTX for the for the global Transcon and so.
That gave us added confidence that we're developing the right products with the right service.
We're looking at the right price points.
Coverage in our <unk>.
Strategies.
To understand the complexities of this pretty small vertical. The fact that there is a lot of different segments that have different needs and be able to create take advantage of understanding all of those different segments and create the right product right coverage, the right cost et cetera for each of those segments. So we feel very good about that.
Most people worry about starlink coming in I think there.
So im trying to find their way they keep changing their mind about what theyre going to do and of course that just.
Resonate very well with the business aviation market, which has long lead times and where people want very steady.
Very steady partners that they know they can trust to actually deliver product service products et cetera. So we feel good about that and then the last question was on the Smart Sky litigation.
No decision and their appeal of the lower court denial of a temporary injunction.
We view that as a good sign because it has been.
Close to half a year now since that was heard.
If the court really felt that there was an urgent need to grant an injunction one believes they would've granted that by now.
When asking for a temporary injunction when it has to serve assert that time is of the essence so.
So we feel good about that and the general trial.
Which was to come later leave that goes to trial in April of 2025 August 2025, I can't remember, which eight months it was so.
So thats still a ways out and there will be a lot of.
Markman hearings and all of that over the next year or so so that will go into discovery.
And.
It will be a time consuming and somewhat expensive process.
Okay.
Just want to make sure I also understand the <unk> Galileo operating initiatives Jess I think you said with $15 million impact Opex wise.
'twenty three is like $3 million or <unk> 10 million for Galileo and 2 million for others.
For Galileo looks like it's going to be $30 million.
<unk> G is that just $7 million that got pushed out just trying to think what the total 24 impact is to compare to the $15 million EBITDA impact for those three items.
Yes Galileo.
As you mentioned and you have that right it's expected to be around.
$30 million approximately $30 million next year.
<unk>, so we pushed out.
$7 million of Opex from this year to next year, but.
We're expecting 7 million in Opex next year, and then for Capex, we're expecting that to be.
More alike.
$14 million, so we pushed out $10 million from Capex. This year to next year, but we had originally planned to have a little bit.
Additional capex next year. So a total of 14 next year <unk> spend in total will be $20 million next year.
Okay and then.
Last one for me is obviously the balance sheets strong bottom line, we've been working to that how much cash do you want to keep on the balance sheet to run the business as we think about all the different components. You are looking at and also obviously the FCC reimbursements.
Yes so.
We'd like to be fairly conservative on this and I think the range is around 50.
50 to 75, which is higher than what we would need to run the business, but we'd like to be conservative.
So when we talk about maintaining adequate.
That's usually the amount that we're keeping in mind.
Makes sense, thanks, a lot for answering my questions.
Yes.
Yes.
One moment for your next question.
And your next question comes from the line of Lance Vitanza of TD Cowen. Your line is now open.
Hi, Thanks, guys. Thanks for taking my questions just a couple around the new product launches.
On five G.
What are the milestones that you can point us to that would help us get more comfortable around the certainty if not the exact timing.
This launch I mean, what specifically needs to happen between here and there.
Right so.
Tried to run through some of those in the call.
I would say that the <unk>.
That service the clock starts then.
I would say second would be are there.
Livery in late Q1 of the FPGA technology to us because that's a new 50 megahertz.
Capacity FPGA version of the chip, we will be able to burn down a lot of risk.
We'll be flying that in Q2.
And because it's an exact software application of the chip we can burn down all software integration risk, we can burn down all integration testing across that network risk.
So those are very significant the only thing the only risk we cannot burn down with that as a.
An issue in the <unk> chip from a hardware perspective.
Got up so you have to test it after it comes off the foundry and then later dates would be when that chip comes off the foundry.
And then when we take delivery of goods it ourself bring up process between it coming off the foundry and being delivered to US and then our site our startup.
<unk> testing I think those are the major major milestones.
That's really helpful and how long does the flight testing component take would you would you expect.
But we start testing find the whole network take about two months, but once we have the chip, but we.
We will burn down most of the risk around flight testing and fine tuning with the FPGA.
Right Im not so much worried about the risk is that im just trying to think about the timeframe and calibrating there, but thats helpful.
And then just sort of a related question I guess with the Galileo launch set to launch relatively quickly on the heels of the <unk> launch do we have to worry about the five G launch being softer than expected or pressured by aircraft operators, basically, saying well Gee, what I was going to go with <unk>, but.
Galileo is going to be here in a couple of months, maybe I should hold off and wait for that.
Yes look it's not ideal to have these two product launches land on top of each other and that wasn't the design as you well know we were going to originally have <unk> out last year, but I think that.
We don't see a conflict because we don't see we see these products as being positioned to very different segments of the market.
Well, while the delays are sort of confuse that communication I think we're starting to see it get straightened out.
The <unk> is really aimed at north American market because thats. Its coverage, it's aimed at those sort of medium sized jets on down that want really good product, but are still somewhat cost conscious.
Wanted to affordable product and <unk> will be cheaper than any satellite product.
The <unk> is aimed.
That sort of medium sized jets on down outside the U S and those those.
Planes do they have no connectivity option whatsoever, no broadband connectivity options whatsoever.
And medium sized jets on down that fly outside the U S to the Caribbean, or Canada, or Mexico et cetera, Hawaii.
Which is in the U S of course, but it is over a large piece of ocean.
So that's where that aimed and then the <unk> is a heavy jet product and that's for.
The Big Jets.
That either fly around the U S and while a lot of connectivity or fly.
Transcontinental routes and it's going to be more more than you probably get the chance continental place. So theyre very different segments, and we're trying to be very clear with the market in terms of communicating.
Which products.
Should be the right products for each segment.
Thanks, very much I appreciate your help.
Yes.
Paul.
One moment for the next question.
And your next question comes from the line of Scott.
Surely with Ross your.
Your line is now open.
Hey, good morning, Thanks for taking my questions I appreciate all the detail and maybe just to dive in quickly in terms of the maintenance events engine part availability et cetera that has been delaying a O L.
The last quarter.
Shipments of our Atg units were down pretty significantly I think there are about a 100 units below where it had averaged over the last six quarters or so it sounds like despite that you are having record activations and youre starting to see a pickup in terms of suspension going away in the month of October and I believe you indicated as well that they are.
Only about 40 units in the channel that around spoken for so implied in the fourth quarter guidance is another week.
Weak Atg unit quarter. So the question is as we get into 2024 are we completely burned down and normalized in terms of channel inventory and that balance now with prolonged gated maintenance events, but now thats starting to work its way through the channel we start to see a reacceleration both of atg units being shipped.
Aircrafts starting to ramp back up again.
I think that the inventory burn down is definitely taking place and when you really look at the 850 or so.
There is an awful lot of those that have actually already been installed we talked about 200 last quarter or this quarter thats down to 187% actually it's much more dynamic than that there were of the 279, where actually activated that was then offset by increased shipments that took it that number back up to 187, So we're feeling much better.
About that part of the inventory if you will.
And yes, like we said all of that 140 are spoken for 32 of those really are at that dealers that took inventory one or two units during COVID-19, hoping they'd get an order they havent and that may be sitting there, but the rest are just a couple of dealers that move a lot of inventory. So we feel that.
That is normalizing and then that will help orders somewhat I think that the countervailing force next year.
We'll be.
People wanting to make sure that they don't.
And with a lot of L. Five inventory after we launched <unk>. So they'll order does fulfill current orders, but I don't think they will be stocking up.
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